Richard Florida
by Richard Florida
Wed Jul 22nd 2009 at 10:00am UTC

Housing and the Crisis, Part I

Housing prices continue to fall nationally but the economic impacts of the crisis are being felt unevenly across the country. Housing values are off roughly a third from their peak in mid-2006, according to the Case-Shiller Home Price Index. Phoenix and Las Vegas have taken the biggest hits, suffering declines of more than 50 percent in the past year. Miami, San Diego, L.A., and Tampa have also been hard hit. Detroit has seen housing prices sink to mid-90s levels. Housing prices have declined less significantly in greater D.C., Chicago, Seattle, Atlanta, New York, Portland, Boston, Denver, Dallas, and Charlotte. But the Case-Shiller data only covers 20 large metro regions.

This week, I take a look at how housing prices have fared across the full set of more than 300 American metropolitan areas. The posts are based on statistical analysis by my colleague Charlotta Mellander. Today and tomorrow, I’ll look at how housing prices have fared since their 2006 peak. Later in the week, I’ll look at the relationship between housing prices and incomes and wages.

The graph below compares housing prices in 2009 to their 2006 baseline price. It’s based on “residual analysis,” comparing the change in housing prices between 2006 and 2009.

Clearly, the two are related – the correlation is 0.903 and the R2 is 0.815. But the slope of the fitted line suggests that, on average, housing values in these regions have dropped by approximately 15 percent. Metros above the line have lost less value than their 2006 worth would predict, while those below the line have lost more.

Under-performers: These are regions where housing values have slipped even more than predicted. Among large metros, the under-performers include: Los Angeles (where values are off $79,789 more than expected based on the national trend), San Francisco (-$79,029), Las Vegas ($-72,421), Phoenix (-$69,897), and Miami (-$53,021). Cape Coral, FL saw the biggest relative decline (- $111,797), followed by Riverside, CA (-$103,683), Sacramento, CA (-$91,640), and Sarasota, FL (-$82,353). Akron, OH (-$59,635) and Lansing, MI (-$57,574) also saw significant declines. Housing values were down slightly more than would have been expected in Atlanta (-$27,413), Chicago (-$16,580), and greater D.C. (-$14,411). 2009 data for Detroit were not available.

Over-performers: The analysis turned up a number of over-performing regions. By that I mean regions with housing values performed better than expected relative to the national trend. Over-performers include: Honolulu (where housing values remain $160,414 more than expected), Boulder ($72,172), Salt Lake City ($68,935), Seattle ($61,997), New York ($58,407), Raleigh, NC ($57,552), Portland, OR ($42,173), Baltimore ($39,896), Austin ($38,181), Philadelphia ($29,011), Boston ($13,644), Houston ($8,693), and Dallas ($5,661).

Stay tuned for more tomorrow.

19 Responses to “Housing and the Crisis, Part I”

  1. Michael Wells Says:

    Cities high on the Creative Index in Rise tend to rank among the over-performers — Boulder (Denver), Seattle, Raleigh, Portland, Austin and Boston.

    Of the creative cities that suffered, San Francisco and Sacramento are both affected by the California crash and were tremendously overpriced. DC is down slightly.

    The Western under-performers also tend to be sprawling – LA, Vegas, Phoenix, Sacramento.

  2. Deep Says:

    Part of the reason why Philadelphia’s housing values did not suffer is because the city has a program to help those who are on the verge of foreclosure. The city basically forced banks to renegotiate mortages with homeowners. Thus, preventing people from abandoning their homes and preserving home values.

    I am not surprised by seeing so many Florida cities facing serious declines. Florida has no income tax, and there are so many loopholes in its corporate tax code that the state is lucky if were to recieve a nickle from them. As result the state relies heavily on tourist taxes and property taxes. Since you cannot support a state by taxing key chains sold at Disney World, the state’s main source of revenue is property tax. Which is fine as long as people keep coming down to Florida. However they kept building and only so many people are willing to live 3 hours from civilization. However, once they stop coming, or stop being able to pay their mortgages, then everything falls apart. As the “New Yorker” calls it, Florida is the “Ponzi State”.

  3. David Says:

    Baltimore has the benefit of being close enough to DC for commuting (about 40 miles), with significantly lower housing costs.

    There was an article recently in our paper on how Batlimore has become kind of bedroom community for people who work in DC who are priced out of that real estate market.

  4. Mike L. Says:

    Wow! If you draw an identity line on the plot, you can see that Salt Lake City may actually have increased! What do thay have that is so special? Could it be that people there don’t over-borrow to buy homes?

  5. Patrick Adler Says:

    Mike,
    I won’t speculate on the causes but your eyes don’t deceive. SLC did see a 13% increase in housing values ( from $203000 to $230100). Stay tuned for more on it and the 20 other cities from our sample that saw increases.

    Patrick Adler
    Martin Prosperity Institute

  6. Jim H Says:

    “Since you cannot support a state by taxing key chains sold at Disney World, the state’s main source of revenue is property tax.”

    Deep,
    uhm, yes you can. It’s called sales tax. Notice that Texas and Florida are not going to go down the toilet like California, who depends on heavy income tax. I will concede that Florida’s property values have gone down significantly, but I would argue that you can expect Florida (and Phoenix for that matter), to be the first to “recover”.

    The main draw will always be the sun and better weather. People prefer to work where they are not looking out their office windows at great weather, but when it’s time to play (vacation), or retire, they’ll move south. If you want to think of that as a ponzi scheme, that’s ok with me.

  7. Creative Class » Blog Archive » Housing and the Crisis, Part II - Creative Class Says:

    [...] the big deal?by Richard FloridaThu Jul 23rd 2009 at 10:00am EDTHousing and the Crisis, Part II Yesterday, I compared 2009 housing prices to their 2006 baseline. Today, I turn to the change in housing [...]

  8. Michael Wells Says:

    Actually, California has pretty heavy sales taxes too. Both sales and income taxes rise and fall with the economy, so it’s taken a double hit. And in much of the state housing was incredibly overpriced, so the correction is hitting a lot of people hard.

    What’s out of whack is the property tax because of Prop 13, which was poorly designed. We sold my mother’s house in Modesto a few years ago for probably twice what it’s worth. Her property taxes was about $330 a year because she had owned it for decades, and there’s a limit on increases. The new owners tax is about $3,200, because the tax value moves to market when the house changes hands. But if I had wanted to keep it in the family, the tax would have stayed at $330. This inequity of course leads to a lot of game playing.

    The Ponzi part of Phoenix is that it’s built on the premise of cheap power for air conditioning and adequate water. If/when either of those get scarce, as water is going to, it will play havoc with real estate. Not to mention sprawl if/when gas prices go up again.

  9. Deep Says:

    Jim,

    Florida is in the midst of its own financial meltdown, it has not seen an unemployment rate this high since the 1970’s, and leads the nation in mortgage fraud and foreclosures. The state relies heavily on real estate, where the market is currently in the gutter. Infact, Florida-along with Arizona-will probably be the last states to recover, because there is no real industry up lift the economy. Even Michigan has some hope.

    It doesn’t matter if the weather is nice, because if there is no industry nobody is going to come. This what developers learned from this meltdown, nobody is going to move 3 hours outside of downtown Tampa, because the weather is nice.

    Sunbelt cities with a traditional economy, like Charlotte or Houston, will be the ones to benefit.

  10. Jim H Says:

    “nobody is going to move 3 hours outside of downtown Tampa, because the weather is nice”

    Deep,
    the problem wasn’t demand, it was the oversupply (and that wasn’t unique to Florida). You are correct that Florida has had a brutal real-estate correction, high unemployment, but I think you are missing the appeal of nice weather for all those boomers who are just beginning to retire.

    More importantly though, I wanted to point out to you the contrast between Texas (who is doing well all things considered) that uses a sales tax instead of income tax, versus California. If you can’t see the obvious benefits of a simpler tax structure to fund the government, I guess there’s nothing left to say…

  11. Trevor Says:

    Does the regression and accompanying lack of analysis reflect more poorly on Florida or Florida?

  12. Deep Says:

    Jim,

    Texas is different from Florida in the sense that it has industrial centers. Austin is a major hub for the IT industry, University of Texas in Austin has a reknown computer science department, and has a thriving arts scene. Houston is a hub for the energy sector, not just oil, but also companies that invest in renewables also set up shop in Houston. It is because the state has real industries, thus the state can weather the financial storm the country is in.

    The oversupply of homes is very unique to Florida and areas which only has cheap land to offer investers, such as California’s Inland Empire. This was only way for Florida to make money. Try to bring as many people as possible, so long as there are enough people coming in tomorrow, we will be ok today.

    So what if retiring boomers are coming to Florida or Phoenix, they’re not going to start up companies, nor create industries. These states are going to have to rely on retirement packages and social security checks.

  13. Deep Says:

    Michael,

    One of the worst effects California’s Prop 13 had on the state was it led to the overuse of public referendums. Both political parties are guilty of abusing referendums. Democrats would get social programs through the legislature by using public referendums, while Republicans will get their tax cuts through the public referendums. Obviously people will vote for tax cuts and programs. As a result there would be low revenue with high expenditures.

    California has other problems as well, such as the legislature needing 3/4 majority in order to pass the budget. Term-limits and over gerrymandering have basically killed any sense of cohesion in Sacramento. Especially since the state is so diverse. The state needs to reconstruct its political system. According to former governor Grey Davis-who was kicked out by a recall-”in theory the state is governable”.

    The state needs a new constitution that reflects the realities of today, rather than of 1879 when it was ratified in its current form.

  14. Michael Wells Says:

    Deep,

    I think many of the problems, like Prop 13, were initiatives rather than referendums. I’m not sure about California, but the Oregon initiative system has been distorted beyond recognition by paid petition gatherers which the State Supreme Court has labeled free speech. All kinds of alarmist initiatives get on the ballot with millions of dollars behind them and get passed with scare tactics. Much of this is beyond the control of the political parties. The legislature is basically powerless, since any tough decisions are going to be challenged by initiative.

    A few years ago I was visiting my mother in Modesto and saw she had a bumper sticker that said “save our homes”. I asked about it, and it was opposing a property tax levy for schools. I said “your property taxes are almost nothing, this doesn’t threaten your home”, which she acknowledged but she had been scared by the direct mail propaganda.

    We spent the weekend with my wife’s sister & her husband who live in Chico. They were saying the same thing about the need for a new California constitution. It’s not only 130 years old, but has hundreds of amendments which make it incoherent and unworkable. The US Constitution is over 200 years old and still works, but is hard to amend.

  15. Deep Says:

    Michael,

    How must the Oregon state legislature respect a voter initiative? The reason why voter referendums are crippling California is they are very hard to override and have no sunset clauses. California is very different today from the 1970’s when Prop 13 was passed. Does Oregon have any sort of sunset clauses, or can the legislature override it because it is not practicle?

    Prop 13 not only had an effect on California’s school, but also on the layout of its cities. A while back Richard Florida posted a study by the Brookings Institute that found the majority of jobs were moving into the suburbs. Elizabeth Kneebone, who authored the study, found in California, caps on property tax forced municipalities to promote execessive development in order to maximize property. Towns are basically bulldozing every open spot of land in order to collect more property tax revenue.

  16. Michael Wells Says:

    In Oregon, initiatives are put on the ballot by signature campaigns, and referendums are referrals to the voters by the legislature. Both have the force of law and no sunset unless its written in. Interesting question what the legislature must respect. Generally they’ve left them alone, but with the budget crisis that’s hitting every state, they just postponed implementing a recent “lock ‘em up” measure without much reaction.

    The bulldozing of farmland in the Central Valley began long before Prop 13. In the 1950’s my family heated our house in Modesto with wood from productive orchards that were being bulldozed for development — if you cut the trees up, you could have the firewood free. My parents went from living in the country to being 5 miles inside the sprawling city in 15 years.

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