Creative Class

Yesterday, we looked at the relationship between housing prices and income. Today, we turn to the relationship between housing prices and wages. Wages are a useful way to gauge regional housing prices because they only count money that is earned by doing work. Income, on the other hand, counts any and all earnings from investments, interest, dividends transfers, and other sources.

The graph below plots housing prices in 2009 against wage levels for 2008 (the most recent data available).

There is a clear, positive, linear, and significant relationship between wages and housing values – the correlation is 0.71 and the R2 0.51. Metros above the fitted line had higher housing prices than wages relative to national levels, while those beneath the line had lower than expected housing prices.

Near the top we see many of the same regions as in yesterday’s analysis. Honolulu is once again the greatest outlier, with housing prices exceeding wage levels with a differential of $384,290. Metros in California once again play a prominent role at the top of the list, including San Diego ($87,365), Los Angeles ($63,340), and San Francisco ($60,148). New York also registers a substantial differential of $76,896; Miami ($46,128) also has a considerable differential.

On the other hand, there are metros where housing prices were less than their incomes would predict based on the national trend. In Decatur, IL, for example, housing prices were $131,344 less than what its wage level could support based on the national trend. In Michigan, both Saginaw ($123,140) and Lansing ($119,334) had differentials over $100,000, as did two Ohio cities, Akron ($105,447) and Cleveland ($105,386). Atlanta ($86,079), Washington, D.C. ($65,446), and Dallas ($51,896) all had differentials of greater than $50,000, while Houston ($48,874), Chicago ($48,794), and Boston ($42,834) all had differentials of greater than $40,000. The difference was more modest in Philadelphia ($20,520). We’ve again omitted Detroit because it failed to report housing price data for 2009.

The past couple of days, we’ve looked at the relationship between past and current housing prices. We saw that there are some regions where housing prices have fallen more than what might be expected based on national trends, while prices have declined considerably less than expected in others.

Today, we shift gears looking at the relationship between housing price and incomes. The graph below compares median housing prices in 2009 to income per capita levels in 2007 (the most recent figures available).

Housing prices and incomes are closely associated with one another: The correlation coefficient is 0.68 and the R2, 0.46. Metros above the fitted line have housing prices that are higher than their incomes relative to the national trend, while those below the line have housing values that are less than what their incomes would predict relative to the national trend.

In Honolulu, for example, the differential was a whopping $371,777. Almost half of the top 10 regions are in California. In San Jose the differential is $120,134, San Diego ($106,625), Los Angeles ($103,278), and San Francisco ($59,633). The differential was also in the Pacific Northwest – Portland ($74,490) and Seattle ($60,848), as well as Salt Lake City ($77,526) and New York ($93,900).

On the other hand, there are metros where housing prices were significantly less than their incomes would predict based on the national trend. In Bridgeport, CT, for example, housing prices were $151,460 less than what its income level could support based on the national trend. In Cape Coral, FL, the figure was $110,460. This was also true in Rustbelt regions like Akron ($106,692) and Cleveland ($105,130) which had differentials greater than $100,000. There were also considerable differentials in two Texas cities, Houston ($93,586) and Dallas ($58,602). In addition to this, Atlanta ($50,166), Chicago ($30,337), Philadelphia ($18,699), and Washington, D.C. ($17,280) all had housing prices that are less than their incomes would predict based on the national trend. We’ve omitted Detroit because it failed to report housing value data for 2009.

Yesterday, I compared 2009 housing prices to their 2006 baseline. Today, I turn to the change in housing prices. The graph below plots the percentage units change in housing prices between 2006 and 2009 against the 2006 baseline price.

There is a significant relationship between the two. The slope is steep, with a correlation of  -0.42 and the R2 of 0.19. Metros above the line have seen drops which are less than would be expected based on national trends, while those below the line have seen drops in excess of the national trend. The numbers in parentheses are the percentage difference between the actual and predicted values.

Under-performers: These are regions where the decline in housing prices has been greater than predicted based on the national trend. The biggest losers are metros in the Sunbelt and Rustbelt. In Cape Coral-Fort Myers, FL, for example, housing prices have declined 47.3 percent more than expected based on the national trend. For Akron, OH, the figure is 44.9 percent; Lansing, MI (-39.6 percent); Cleveland, OH (-35.4 percent); Grand Rapids, MI (-33.9 percent); Phoenix, AZ (-31.7 percent); Sarasota, FL (-29.7 percent); Riverside, CA (-29.3 percent); Toledo, OH (-29.3 percent); Palm Bay-Melbourne, FL (-29.1 percent); Sacramento, CA (-28.8 percent); Canton, OH (-28.3 percent); and Las Vegas, NV (-28.2 percent). Miami (-18.56 percent), Atlanta (-18.05 percent), Chicago (-11.72 percent), Los Angeles (-10.07 percent), and Washington, D.C. also performed worse than expected.

Over-performers: There were again a series of regions that performed better than the national trend. These are places where housing prices have held up better than expected based on the national pattern. In Honolulu, HI, for example, housing prices remain 31.1 percent above what could be expected based on the national pattern. Cumberland, MD, a suburb of Washington, D.C., has held up 30.4 percent better than expected. In Salt Lake City, UT, the figure is 29.8 percent; Bismarck, ND (26.2 percent); Beaumont-Port Arthur, TX (25.9percent); Farmington, NM (25.7 percent); Binghamton, NY (24.2 percent); Columbia, MO (22.4 percent); Raleigh, NC (21.3 percent); and Austin, TX (19.7 percent). New York (11.3 percent), Philadelphia (7.4 percent), Houston (6.37 percent), and Dallas (+4.2 percent) also performed better than expected.

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.

A new study finds that housing prices have had a big effect on recent mobility. Here’s a snippet from Real Time Economics.

Housing affordability has played a greater role in prompting residents to leave one state for another over the past decade, according to a study released by the Federal Reserve Bank of Boston.

This is a change from the past, when jobs were the primary economic driving factor behind state-to-state migration. The study helps explain why migration has fallen off so sharply in this recession — with the drastic fall in housing prices, many people are staying put not for work but because they are tied to a home they either cannot sell or refuse to sell at today’s prices.

The FRB study focuses on New England, which for years has seen a net outflow of residents to other states. The author, Boston Fed economist Alicia Sasser, shows that job growth (or lack thereof) and housing prices played equal roles in New England’s out-migration between 1997 and 2006. Between 2001 and 2006 about 100,000 additional people left Massachusetts either for a job or to seek lower housing prices, according to Ms. Sasser’s research. Roughly 60% of those people left for housing affordability …

Mr. Sasser’s study may give a glimmer of hope to states that have lost people, at least high-cost states like Massachusetts that have lost people to places with lower-priced housing (cities like Buffalo that have lost jobs will likely continue to lose residents.) When the economy eventually picks up, lower housing prices may bring the balance between jobs and home prices back into equilibrium, prompting more New Englanders to stay where they are or even move back.

Writing in The Atlantic, I argued that the economic crisis was reshaping America’s economic geography, with big city centers and mega-region hubs like New York City, talent-rich regions like greater D.C., and college towns weathering the storm relatively well, while Rustbelt cities and shallow-rooted Sunbelt economies being much harder hit.

Take a look at the graph below from the newly released SP/Case-Shiller Home Price Index for April.

Phoenix and Las Vegas have taken the biggest hits: Housing prices there have declined more than 50 percent in the past year. Miami is next, then Detroit where housing prices have sunk to mid-90s levels. San Francisco is the only significant talent region to be pummeled. Part of this is to be expected given the tremendous run-up in housing prices there, but still prices remain higher than 2000 levels. San Diego, L.A., and Tampa have all seen declines in excess of 40 percent.

Housing prices have declined less significantly in greater D.C., Chicago (hub of the great Chi-Pitts mega-region and a magnet for regional talent), Seattle (a high-tech, high human capital center), Atlanta (a talent hub for the southeast), New York, Portland, Boston, Denver – (talent hub for the Rockies), Dallas (a mega-region hub), and Charlotte (which along with Atlanta hubs the great Char-lanta mega-region). Cleveland breaks the pattern, but like Detroit its absolute housing values have fallen. Prices in greater D.C., along with Denver, Dallas, and Cleveland, were actually up in April.

The Index also tracks prices in terms of their 2000 baseline. Nationally, it’s at 140, meaning housing prices remain 40 percent higher than in 2000, more or less in line with 2003 prices. Looked at it this way, the geographic pattern could not be more striking.

Rustbelt cities have seen, by far, the biggest declines relative to 2000 prices. Detroit and Cleveland are the only two cities where housing values have slipped below 2000 values – Detroit at 69 percent and Cleveland at 98 percent.

Prices have just about fallen back to 2000 levels in Sunbelt cities like Phoenix (105), Atlanta (105), Las Vegas (112), Dallas (115) and Charlotte (118). Miami (145) and Tampa (140) break the pattern; their prices remain significantly above 2000 levels. My guess is that prices will continue to fall and sharply in these two markets in the coming months.

But prices in prices in Boston (146), L.A. (149), greater D.C. (167), and New York (170) remain significantly above – 50 to 70 percent above – 2000 levels. While these prices may dip some, my hunch is these markets will not be devastated and will remain substantially above 2000 levels.

The SP/Case-Shiller Index suggests that housing prices are still falling and have another 30 or more to go before they hit bottom. One thing you can be sure of, it will continue to be felt unequally across regions.

Larry Summers (via Calculated Risk) says a key objective of economic policy must be to:

…address the problem which has, frankly, gone unattended for much too long of declining house prices.

Calling planet earth… Housing prices – according to even a cursory reading of say the Case-Schiller Index – have a long, long way to come down, and until then the economy simply cannot be reset for growth.

We won’t recover until we move beyond the fictitious asset bubble economy, as Nouriel Roubini outlines:

For the last 30 years the US has been growing fast only during periods of asset bubbles that eventually burst with significant economic and financial costs. The 1980s real estate bubble went bust in the late part of that decade leading to a severe banking crisis for the Savings and Loan banks, a credit crunch and a severe recession in 1990-91; next the 1990s tech/internet bubble went bust in 2000 leading to the 2001 recession; massive monetary and credit easing – as well as lax supervision/regulation of mortgages and credit – led to another housing and credit bubble that has now gone bust creating a severe financial crisis and recession.

The current monetary easing may lead to another bubble but we are somehow running out of bubbles to create … We need to create an economic system that is less prone to bubbles and more likely to lead to sustainable stable growth.

For the last few years the US has overinvested in the most unproductive form of capital – residential housing stock that increase utility but not labor productivity – and not enough into physical capital that increases the productivity of labor.

Also we overinvested in the financial sector, a corollary of the housing boom … And having a country where there are more financial engineers than computer engineers or mechanical engineers means a misallocation of human capital as well.

So we need to create a growth model relying less on housing/real estate, less on finance and less on having the brightest minds of the country going into financial services rather than into the production and innovation of new and improved goods and services.

Amen.

More than 75 million American households own their own homes, according to the new American Housing Survey (h/t: Kevin Stolarick). About a third of these own their homes free and clear, and a whopping 64 million have equity in their homes, while 40 million have homes that are worth more than what is owed on their mortgages.

That doesn’t mean we’re out of the woods yet. Some 12 million households, or 16 percent, owe more than their homes are worth, according to data from Economy.com reported in the Wall Street Journal. The trouble in the housing market is a recent development, fueled by the bubble and lax lending standards of the mid 2000s. Among people who bought within the past five years, nearly 30 percent are under water, the Journal reports.

Prices are coming down fast regionally, falling back to 2003 levels in San Diego and Boston, and to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, and Minneapolis, the Wall Street Journal reports. But in many regions they still have a long way to go. The graphic below, from the Journal, shows the amount housing prices have fallen already and the overall price change required to bring them back into line with historical levels of affordability. The story also notes that prices in close-in neighborhoods in “super-star” cities have held up best. Click here for more interactive graphics.