Real Estate and the Creativity Index

Over at Time Magazine`s Curious Capitalist, Justin Fox compares the Case-Shiller Housing Price Index which measures appreciation since 1987 to my Creativity Index. His results, here, and after the jump. Michael Wells weighs in with a comment on this blog. Michael has much to be happy about given Portland`s long and short-run performance.

I`m actually struck by the pattern Fox documents and believe it fits in rather well with my theory. I promise to dig into it even more once I`ve had a chance to digest the data. But for now, let me just jot down some quick reactions.

First of all, my earlier post which Fox points to was about the recent turnaround in the Case-Shiller Index as was a post here earlier today.

That said, over the long-run, the big outliers in terms of the Creativity Index boil down to  two cities - Miami and Las Vegas - both of which perform much better on the Case-Shiller Index over the past two decades than their (low) scores on my Creativity Index would suggest. One explanation might be that both regions have high Gay Index values (their technology and talent scores are low) which as Charlotta Mellander and I have found are extremely closely associated with median housing prices.

However, I think there is another, even more significant factor at work. The significant real estate appreciation experienced by Miami and Las Vegas over the past couple of decades was speculative and thus badly out of whack with their economic fundamentals. These are fun-and-games resort destinations which saw huge and unsustainable gains during the go-go  years of the housing boom.

My main point is that now things are coming back to earth - and more into line with what the Creativity Index would predict. After two decades of significant appreciation Miami and Las Vegas have experienced big declines and are headed for even bigger ones, as the Case-Shiller Index documents. (I live in Toronto and want a house in warm weather and I`m prepared to wait it out another year or two until the south Florida market starts to really correct). My top Creativity Index regions - places like San Francisco, DC, Boston, Seattle, Portland, Denver, etc. - are showing mixed performance - some are declining more than others. But, if my priors are right, they should decline much more modestly than Miami and Las Vegas, and rebound quicker once things start to turn around.  A number of these markets are actually seeing mixed performance. The DC market, which I know very well (having sold a house there this past summer) is declining overall on Case-Shiller. But it is really a tale of two markets with steep declines in far-off suburbs, while the city and close-in markets seem to be holding on.

To my mind, the biggest outliers in in terms of short-run Case-Shiller performance are San Diego and Charlotte, though both are in sync with the Creativity Index over the long-run. San Diego has been hard hit in the past year or so, which I would not have expected given its location, long-run super-star status, high-tech economy, and Creativity Index score. But the region is known for boom and bust real estate cycles. Charlotte has been much stronger than I would expect in the current downturn, perhaps due to its strong financial sector.

Fox says this is the last of his housing market posts for a while. I hope not.  He`s been doing yeoman`s work helping advance our understanding of the unfolding dynamics of the housing and real estate markets which are sure to play a big role in U.S. and regional economic performance over the next couple of years.  Anyway, I have another one to throw into the mix:  Housing in Toronto, Vancouver, Sydney, Melbourne, and Brisbane continues to appreciate like crazy.  Canada and Australia have surged ahead of the US on the UN Human Development Index. Might global indicators like the UN Human Development Index or my own Global Creativity Index help to explain these differences among international housing markets.

Creativity Index Score, followed by Case-Shiller Index in percentages, January 1987-current for 14 regions

San Francisco, 2,  136%
Boston, 5, 30%
Portland, 7, 141%
Washington-Baltimore, 11, 90%
Denver, 14, 47%
San Diego, 19, 117%
New York, 20, 48%
Los Angeles, 31, 129%
Chicago, 39, 64%
Tampa, 51, 45%
Charlotte, 60, 14%
Miami, 72, 94%
Las Vegas, 95, 72%
Cleveland, 118, 17%

Comments

[Justin Fox]

Oh, I'm happy to write more posts on the housing market. I just think my readers might be getting sick of seeing charts of the Case-Shiller indexes (I've done three in the past couple of days). Although they are very colorful.

[RF]

I love those graphics.

[Steven]

Portland rocks! :-)

[Matt]

For the recent US housing market, I'd want to blame the "Creative Financing Index". It seems like US housing would be an outlier on any international housing comparison to HDI or Global Creativity Index, because the swings in US housing have been so dramatic over the last few years while e.g. the HDI changes have been a slow erosion of global standing.

[Michael Wells]

Portland, and to some extent Seattle, benefited from a combination of factors listed in an Oregonian article yesterday:
• People keep moving here from out of state, and they have to live somewhere. Almost 5% (102,000) of the area's population moved here in 2006. Seattle's rate was higher.
• Oregon's job growth has outpaced national averages recently.
• Portland didn't have the hyper-inflation in prices of the boom cities. House prices are up about 85% from 2000. LA & Miami are up about 150%.
• Partly because of lower prices, Portland had fewer sub-prime loans than many regions, and we're almost dead last in delinquencies and forelosures.
• Oregon's land use laws and urban growth boundaries kept new speculative subdivisions from spreading across the landscape, so there's not the same oversupply as some other Western cities.
• While high by national standards, Portland has the lowest housing prices of any big West Coast city from Vancouver to San Diego.

I wonder if some of these factors are also true of other Creative Class cities?

Richard's comment about DC's two markets also rings true here. I became a sort of open house groupie when we remodeled our kitchen a few years ago, I probably go to a couple a month. Last weekend I saw an ad for a house for $1 million at NW 20th & Kearney, a neighborhood that not too long ago was working class and cheap - and is less than a half mile from downtown. I wondered how much the price would have to come down in today's market, but the agent said it had actually sold within 3 days, they were holding the open house because the ad was already placed in the paper. On the other hand, a friend of a friend is trying to sell a mansion next to a country club for about $1.5 milion and having no takers. Again, I wonder if this close in/suburb split is true of other Creative Class cities?

[RF]

Touche, Matt. OK you Portlanders, you can stop your gloating! I believe we have a speaking engagement in Vancouver this spring - It will be my first time there. I haven't visited Portland since about 2003, when I spoke at Americans for the Arts, visited an amazing microbrewery and had pizza with your former mayor (who was a hoot! as the kids say). Maybe I'll have to come see how you've done it for myself.

[Michael R. Bernstein]

Richard, I'll note again that Las Vegas' RE market has a split personality. While houses are experiencing the drops you've noted (and worse), luxury loft high-rises are still doing very well as Las Vegas continues to undergo so-called Manhattinization.

[Charlotte Real Estate-Terry McDonald]

Michaels post above is a very close to a description of Charlotte, NC
Compare point by point:
80,000 people relocated to Charlotte in 2006. 300,000 since 2000. That is like Cincinatti moving to Charlotte.

Charlotte job growth has considerably outpaced the nations since 2000

We've averaged 4.6% appreciation per year since 2000- no speculative boom

And Radar Logic called Charlotte the 3rd most affordable major city in the US...

It seems to me the correlation in increasing prices is due more to the local economy than a creative class. No one thinks of Charlotte NC as a future Silicone Valley, but our economy is humming. Many are familiar with Charlotte's financial sector- we are the 2nd largest city in managed financial assets in the US, 4th largest in the world. We also have many "old economy assets" for example the largest consolidated rail connections in the US. Combine that with the 10th largest airport in the US in daily flights, the 8 fortune 500 companies that call Charlotte home, and we have a very dynamic and fluid economy.
I think the same could be said (different reasons) of Seattle and Portland, and San Francisco.
So maybe it is the economy, but most of the dynamic economies are high in creativity?

[Charlotte Real Estate-Terry McDonald]

Michaels post above is a very close to a description of Charlotte, NC
Compare point by point:
80,000 people relocated to Charlotte in 2006. 300,000 since 2000. That is like Cincinatti moving to Charlotte.

Charlotte job growth has considerably outpaced the nations since 2000

We've averaged 4.6% appreciation per year since 2000- no speculative boom

And Radar Logic called Charlotte the 3rd most affordable major city in the US...

It seems to me the correlation in increasing prices is due more to the local economy than a creative class. No one thinks of Charlotte NC as a future Silicone Valley, but our economy is humming. Many are familiar with Charlotte's financial sector- we are the 2nd largest city in managed financial assets in the US, 4th largest in the world. We also have many "old economy assets" for example the largest consolidated rail connections in the US. Combine that with the 10th largest airport in the US in daily flights, the 8 fortune 500 companies that call Charlotte home, and we have a very dynamic and fluid economy.
I think the same could be said (different reasons) of Seattle and Portland, and San Francisco.
So maybe it is the economy, but most of the dynamic economies are high in creativity?

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