Averages and the Housing Market

Economists J.R. Abel and R. Dietz of the New York Fed have an interesting piece in the March issue of "Current Views." Nationwide, home prices rose at 8% per annum from 2000-2006, meaning they would have doubled every nine years! Now, these weren't stock prices, but residential home prices. Fast forward to 2009, as we look at the top 10 metro markets for home price appreciation, and we find markets like Buffalo, Rochester and Syracuse, New York. In fact, Buffalo was the 6th best performing market for price appreciation in 2009.

Now, in a sense, the authors are measuring a truism, the higher up you are, the faster you're going when you hit the ground...or the bigger the bubble, the bigger the mess when it bursts, but there are instructive points in their data.

Upstate New York (USNY) markets saw existing home sales grow by only 15% in the decade from 1995-2005, whereas the broad, national market saw existing home sales rise by 75% over the same period. So, nationwide, things were really frothy, but within that average, we had dispersion. Our national housing bubble like Lehman's portfolio risk was concentrated.

Of the 383 metropolitan markets covered by FHA surveys, 65% (249) of the markets had average annual price appreciation less than the national average.

They have a very instructive chart that maps all of the metropolitan areas into four quadrants:
"No or moderate boom; no bust," "Boom, no bust," "No or moderate boom; bust," and "Boom, bust." 57% of the 383 metro markets were in the "No or moderate boom, no bust" category. These included USNY markets like Binghampton, Buffalo, Elmira, Rochester, Syracuse and Utica.

The worst markets are strongly concentrated in California, Washington, Florida, Arizona, and Las Vegas, NV. Of course, we knew and suspected this, but it's nice to see the data and analysis laid out. It's like looking for the cause of a heart attack. Although the entire organ is at risk, we need to find the culprit lesion in the occluded vessel. Well, we had quite a few lesions, in sunny climes.

There have been a few misinformed apologists who suggested that subprime mortgages were not the key to the financial meltdown. Hopefully, they are in treatment now. The Fed economists bring together data on nonprime mortgages and show that the penetration rate (mortgages per 1000 homes) was 82/1000 in the boom/bust markets versus 50/1000 for the national average. The table showing performance of these mortgages right to foreclosure is sobering.

I suppose the good news is that reasonable employment growth in the non-boom/bust markets could bring some of these housing markets back relatively quickly. However, as other research has shown, this may not be likely because of the limited geographic mobility of job seekers tied down by their homes, and because of job skill mismatches. We need corporations and businesses to start addressing these issues by thinking long-term and looking to expand their capital spending and market development.