Creative Class

Map by Scott Pennington, Martin Prosperity Institute

This map charts the housing-to-wage ratios for U.S. metropolitan areas in 2006, the height of the bubble. It differs from the more commonly used housing price-to-income ratio. Historically, housing prices have been about three times income, but by 2006 housing prices had soared to a high more than five times incomes. In Irvine, California, the housing price-to-income ratio soared to 8.6 by 2006.

The housing price-to-wage ratio may provide a better gauge of housing bubbles. Income is a broad measure that includes wealth from stocks and bonds, interests, rents, and government transfers and other sources. Wages constitute a more appropriate gauge of a region’s underlying productivity, accounting for remuneration for work actually performed.

Forget ratios like four or even eight. Six regions – all in California – posted ratios of 15 of greater: Salinas, Santa Cruz, Santa Barbara, Oxnard-Thousand Oaks, Napa, and San Luis Obispo. Another 12 metros had ratios above 10 – L.A., San Francisco, San Jose, San Diego, and Riverside, California, as well as Honolulu, Hawaii, and Naples, Florida.

The housing-to-wage ratio also generates a number of surprises. Greater New York’s ratio (9.4) was slightly higher than Las Vegas (9), and Greater DC..’s (8.7) slightly bested Miami (8.4). Boston (8.1) and Seattle (7.6) topped Phoenix (7.2). Chicago’s (5.9) was higher than Tampa (5.6) or Myrtle Beach (5.5).

What regions seem to have avoided the bubble? The cream of the crop on the housing-to-wage ratio are Dallas (3.5), Houston (3.2), Pittsburgh (3), and Buffalo (2.8).

Even though the new Case-Shiller Index shows that housing prices in the New York region have fallen by 9.2 percent this past year, a Manhattan apartment – and for that matter a Brooklyn apartment – still seems to be a pretty expensive proposition. This is what happened when a young couple paying $3,300 a month for rent in Manhattan went out to look for a new apartment according to the NY Times:

A two-bedroom reconfigured into a three-bedroom was available at Chadwin House, circa 1962, on Seventh Avenue near 18th Street. The 1,100-square-foot apartment was originally listed for $1.949 million, but the price dropped to $1.25 million by last spring when the Thomases saw it. Everything about the interior felt dated; they had no interest in doing renovations … An agent said there were great values on the Upper East Side. But there was only one subway line there. “Being mobile is important to us,” Mrs. Thomas said …

Instead, they decided to hunt in Brooklyn, where so many subways converge. “It was hard to turn back once we saw what square footage we were getting for the same price,” she said. A two-bedroom on Amity Street in Cobble Hill, for just under $1 million, took up the top floor of a four-unit brownstone … They were captivated by One Brooklyn Bridge Park, a former Jehovah’s Witnesses printing plant by the waterfront …“Thankfully, it was $1.7 million,” he said. “It was so out of our price range. You lament the fact you are not rich and cannot buy it. If it were $1.3 million, we would have been trying to scrape up pennies to see if there was any possible way.” …

They gave Chelsea another try, visiting a two-bedroom on a low floor in the Milan Condo on busy West 23rd Street, on offer for around $1.2 million.

An ad for the 27-story BellTel lofts, the 1930 Art Deco building once housing the New York Telephone Company, seemed “like just another listing” amid the condominiums in downtown Brooklyn … So the agent showed them to a unit on the second floor … Once inside, they were awestruck. It was by far the biggest place they had seen — more than 1,700 square feet. The price, they were told, had just dropped to $799,000 from $899,000. Monthly common charges were in the mid-$400s.  They overlook a row of closed storefronts …“You set a budget and everyone shows you stuff at the top of your range,” Mrs. Thomas said. “I am less stressed than I would be if we bought a $1.2 million apartment.”

For the statistically minded, the Case-Shiller Index value for NY is 183, or 83 percent appreciation, over 2000 values, by far the highest of any region tracked by their index. Washington, D.C. is second, followed by L.A., and, surprisingly, Miami. Phoenix is 123, Dallas 115, Alanta 113, Cleveland 105, and Detroit 80 (meaning its current values are roughly 20 percent less than 2000).

Las Vegas housing market sure has taken a big hit, down by roughly 30 percent according to the Case-Shiller Index. But Robert Lang and Mark Muro argue it may be more than just a city of sand and sprawl.

Las Vegas, best known for its gambling and entertainment, has also emerged as a deal-making center of world importance. Because Las Vegas is such a “fun” place and has a large tourist capacity in terms of hotel rooms and meeting space, it attracts the nation’s largest trade shows.

These shows form ad hoc market exchanges that gather whole industries to a common space to make deals. The irony is that what happens in Las Vegas arguably reaches well beyond the city in terms of business activity. The city’s reputation for discretion in personal matters has enhanced its attractiveness as a public space.

As a place for business networking, Las Vegas is, in this sense, a leading world city of great importance to the American economy. The city has not reached this status by traditional means, and conventional data measuring economic activity do not easily capture its form of exchange.

In a world where face-to-face interaction still matters — and may be even more important than ever — Las Vegas offers world-class venues for people to meet and do business. To get a sense of this, consider the variety and size of some of the trade shows that have recently convened in Las Vegas, including the National Association of Broadcasters (110,000 attendees), the World of Concrete Exposition (85,000 attendees), and International Consumer Electronics Show (150,000 attendees).

Some organizations now have annual meetings that have grown so large that Las Vegas is the only venue big enough to hold their major annual trade shows. A good example is CTIA — The Wireless Association. This Washington, D.C.-based trade group could hold its largest exhibition in Orange County, Calif., as recently as 2007.

But as the cell phone industry took off, attendance shot up and future annual conventions are now scheduled for Las Vegas. Although to outsiders a trade show can seem trivial for a rapidly evolving technology such as wireless, these are make-or-break events for many start-up firms. Their ability to have access to the entire industry — if just for several days a year — can provide the basis for key contacts that lead to everything from patent licensing to venture capital deals.

Ironically, wireless is one of the most space-liberating technologies ever devised. Give many high-end white collar workers a 3G iPhone or BlackBerry and they can pretty much do their entire job from anywhere in the world. But in the end, business is all about trust, and that still requires face-to-face encounters.

Las Vegas now plays the highly critical role of gathering all the firms in key industries in one place where they can exchange ideas in person. The fact that Las Vegas is especially fun and frivolous — an adult Disneyland — creates even more incentive for people to attend its conferences, which is how it became the nation’s preeminent convention destination in the first place.

To all the killjoys who now want to shame people out of a Las Vegas convention visit, we say that a major stimulus for the country remains the social lubricant that Sin City provides business contacts.

Las Vegas’s fate now hangs in the balance between its failing real estate industry and more resilient convening/entertainment industries (also, throw in water shortages for good measure). The trick is for Las Vegas to find ways to exploit its advantages in temporary face-to-face exchanges that really only generate hospitality dollars into a more fixed regional-advantage in emerging sectors. There are some promising areas such as the furniture mart (a kind of permanent trade show for the interior design/building industry), which could attract architectural and design firms and even lead to industrial design with the right investments. Las Vegas is really a lab to see how major “convening regions” may leverage their now ephemeral advantages as world cities by capturing these exchanges in their year-round economy. Orlando fall in the same category.

Like many people, I was uplifted by President Obama’s speech Tuesday night. But, today it’s back to the real world. I find myself in total agreement with this assessment from Seeking Alpha.

You have undoubtedly heard of the Case-Shiller Index. It is a commonly cited index for tracking housing prices. The December read is now out showing a YoY drop of 18.5%, worse than predicted. That is not what is scaring me … He has an index of American home prices going back to 1890. According to this index, the housing bubble we just experienced was by orders of magnitude worse than any other we have ever seen in this country. Moreover (you better be sitting) housing prices have a lot further to drop … He believes we are only halfway back to fair value and usually during a correction we overshoot fair value. You add into this equation the effects of a global downturn, job losses, reduced wages and the like and one can easily imagine us overshooting the trend line significantly.

I firmly believe we will not find a bottom on the economy until we find a bottom on housing. From this data, that bottom is still a long way off, as in 3-5+ years off, and it is a lot lower than most have predicted. That is far worse than this doom-and-gloomer was thinking.

So that puts recovery out to say 2012 or 2014. From where I sit, that may even be too optimistic. Both the Long Depression and the Great Depression lasted some two decades before real recovery came about. I could be in my 70s before this thing turns around. And unless he has four terms or so, Obama will not preside over recovery. My heart may feel differently, but my head tells me there is a long, long road ahead of us.

(Via Calculated Risk and  Data 360).

New York City strives to diversify its economy out of finance – focusing on incubation and “garage” spaces for creatives and entrepreneurs. The New York Times:

Rather than write them off as losers in the casinos of capitalism, city officials are encouraging them to start over, the Silicon Valley way. As part of a $45 million program, the city will subsidize garage-size offices as hatcheries for their most promising ideas for new businesses in finance or other fields.

Ryan Avent sees the crisis as an opportunity for the Big Apple, but hard choices must be made:

New York should also come to grips with the fact that high real estate prices may have cost it some economic vitality. The expense of homes and business space no doubt led to a loss of talent to other metropolitan areas. It’s difficult to take a professional risk when one has to work all out to pay the rent.

In one sense, then, the crisis creates a direct opportunity for the city. Assuming that basic public services can be maintained, the decline of real estate prices in New York could help new industries to flourish. It’s impossible to overstate the advantages the city has available in terms of talent and institutions. But New York leaders should learn from their heavy dependence on Wall Street, the wealth of which crowded out other industries — an unbalanced income distribution is risky for a city. To prevent this from happening in the future, New York needs to focus on affordable housing, and should work to make it easier to build a lot of new housing. It should also stay focused on services that make middle-class city life possible: good public schools, good public transit, good public safety, and good public amenities, like parks and museums.

Cities in the sand sink deeper, according to the Wall Street Journal.

Builders rushed into this one-time agricultural crossroads during the housing boom. They put up beige stucco houses on winding streets, with names like Heavenly Place and Good Vibrations Lane. They lured young people who couldn’t afford homes in nearby Phoenix or its costly suburbs. The population soared to 37,000 last year from 1,400 a decade ago, making Maricopa one of the nation’s fastest-growing towns. Now, it’s become a dead end for some of those people.  “We’re trapped,” says Tracy Campbell ..

Housing prices nosedive again according to the new Case-Shiller Index: Phoenix and Las Vegas remain hardest hit.

It’s impossible to get mortgages above the conforming limit – that means the market is virtually frozen in regions like New York, San Francisco, and D.C. The Wall Street Journal:

The lack of financing is particularly acute in markets where rising home prices have made jumbo loans a necessity for even middle-class borrowers, such as New York City, coastal California and Washington, D.C. “If you own a $650,000 home in many parts of this country, you’re not a wealthy person by any stretch, and you’re being cut out of any relief,” says Guy Cecala, publisher of Inside Mortgage Finance. Around 4% of all borrowers have loans that exceed conforming limits, according to an estimate by First American CoreLogic. But that share rises in high-cost states such as California, at 17%, and New York, at 8%. condos – with high rates.

An essay on how the crisis brings tough times to troubled towns (via Planetizen).

Wired Magazine on the need to shift from cars to people/ pedestrians.

The new Case-Shiller Index is out and the results are not pretty (h/t: Allison Kemper). Overall, the index is down 16 percent over the past year and more than 20 percent since its peak in 2006. The biggest declines – on the order of a third – are in Phoenix, Las Vegas, and Miami. Little surprise there. But San Diego, Los Angeles, and even San Francisco appear to be hard hit. Washington, D.C. has also registered a significant decline – so much for those who thought its housing sector is insulated by federal spending.

I read this graphic in light of two related issues. First, there remains great intra-metropolitan variation in housing prices and housing price trends. Ex-urban Virginia has been hit much harder than Northwest Washington, D.C. or Bethesda, Maryland, though both of those have also weakened off their peaks. Second, the high-end neighborhoods which had appeared so resilient are now beginning to show weakness and decline. This is particularly true of super-resort locations, for example, high-end waterfront locations in Miami Beach or San Diego – a good friend tells me a record number of properties have recently come for sale on Nantucket. But this trend is now also affecting the highest end super-star locations like Manhattan and Greenwich, CT, as the financial class has gotten clobbered.

And for our Canadian readers, here’s what Shiller has to say on Canada’s real estate market in the Financial Post: (McClean’s ponders “Canada’s Looming Real Estate Crisis.”):

Asked whether that meant Canada could face a similar bust Mr. Shiller said: “Yes, especially in places that went up a lot like Vancouver and Calgary. I don’t think Toronto has been quite as extreme.”

Shiller’s track record is beyond prescient: I sure hope he’s right about my new hometown.