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December 29, 2007

« Most Ridik-a-lus City List Ever | Main | Urban Sound System »

Paul Krugman asks how far is down? 

"So I come down to the view that the price-rental ratio will have to move most if not all the way back to historical norms. And that’s a long, long way down."

Brad DeLong and Ryan Avent weigh in.

My assessment: it all depends on where you are.  It's not as simple as zoned versus flat or coast vs. middle.  This picture is geographically complex.

The Midwest will feel it badly.  Speculative markets with little in the way of a "real economy" have an even longer way to the bottom - South Florida and Las Vegas are headed a long, long way down.  That decline is just beginning to start because owners and investors haven't quite woken up to the new reality - sooner or later they will.  Suburban markets are also in for a long tumble.

The places that will hold up best are urban markets where supply is limited in major creative/ super-star centers - largely as a result of global demand for those properties.  NYC - that is Manhattan - will hold up best, but San Fran, urban DC, urban Boston, Seattle and the like will weather the storm better than most predict. 

One thing that is likely to come out of this, as Clive Crook and Tim Hartford are on to, is the reversal of the long shift toward homeownership. It will become clearer and clearer to individuals how inflexible home-ownership is especially during downturns in the market.  Leasing will start to comeback, not just among the working poor and middle class; it's resurgence will be led in luxury markets by the reasonably well-to-do, who will not want to get caught in this kind of bind again.  And with the market stuck in the pits, they'll have a plethora of great rentals to choose from.

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Comments

Michael Wells

Getting beyond whether there will be a bust, what are we seeing here?

The (moderate) elasticity of zoned markets: What I see in Portland and elsewhere is lots of high rise condos and apartments being built. They're not making more land, but they're making more property -- and these are mostly at the high end of the market.

As Avent says "the great Housing Bubble of the Aughts probably acted to massively increase the nation’s stock of housing.." Yes. hundreds of thousands of units were built. Developers are selling houses cheap to get rid of inventory. In the long run this is probably to the good, whether those houses/apartments are bought or rented.

The problem is still towards the bottom. The US hasn't invested in low income housing for decades, and we still have homeless families and people paying over half of their income on housing. In fact the boom has driven prices up, making it harder for low end workers, and incidentally for struggling artists, to keep up.

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