Saturday, August 23, 2008

Real Estate Bubble? Only 4 States: CA, FL, NV, AZ

Tyler Cowen writes in today's NY Times:

A bursting real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.

Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck.

Of course, asset prices haven’t been rising much lately, so many people will need more savings for their retirement or for possible emergencies.

MP: I'm not disagreeing with Tyler, but his comments made me think about the possibility of a U.S. real estate bubble, and the possibility that even without a real estate bubble/crash, we could experience sustained falling home prices nationally. But there really is no "national real estate market," since all real estate is local (and even varies within an individual zip code), and what is happening in Florida or Nevada could be much different than what is happening in Texas and Michigan.

Using the Office of Federal Housing Enterprise Oversight (OFHEO) quarterly real estate price indexes for U.S. states through the first quarter of 2008 (data available at the St. Louis Fed), I inspected the graphs for the housing price index in each of the 50 states, and found the following:

For four states (Arizona, California, Florida and Nevada) there has definitely been a real estate bubble with a definite crash in prices in in recent quarters (see top chart above of Nevada). For six other states (Hawaii, Maryland, Massachusetts, Michigan, Rhode Island and Virginia), there's some correction in prices going on, but not enough of a price drop to make it a crash (subjective opinion, see middle chart above). For the other forty states, it seems clear that there hasn't been a crash at all, and real estate prices have continued to increase in most of those forty states (see bottom chart above), or have leveled out.

Bottom Line: To the extent that there has been a real estate bubble in the U.S., and a subsequent crash in home prices, it's been pretty isolated to a small group of states like CA, FL, NV and AZ, and most of the country has seen home prices continue to rise, or flatten out. See graphs of each state below:



At 8/24/2008 3:28 AM, Anonymous Anonymous said...

Economic activity is not distributed evenly accross all the states in the us. What does a graph of the home price index averaged for whole US look like if you make a weighted average based on each states economic activity?

If California goes into a recession because of its housing bubble, how does that effect nearby states that may do business with californians?

At 8/24/2008 3:51 AM, Anonymous Anonymous said...

And then there is this chart...

At 8/24/2008 10:14 AM, Blogger Dave Narby said...

I don't think the argument MP is making is that we're in an economic boom, just that it isn't as bad as being portrayed in the media.

The question is, how big is the slowdown going to be?

Roll them bones!

At 8/24/2008 10:45 AM, Anonymous Anonymous said...

No Virginia?

At 8/24/2008 11:38 AM, Anonymous Anonymous said...

Tyler Cowen never predicted the housing bust. And neither did you. If anything, you subscribed to the Ben subprime is contained Bernanke meme. A bunch of quacks from the academe, I say.

Firstly, why would anyone believe the data presented by the OFHEO. After all, it was the regulatory overseer of the soon-to-be-announced Fannie and Freddie nationalization. Hecka of a job, Lockhart.

Secondly, on a national basis, May 2008 house prices have retreated to the November 2005 level. Or don't you believe in the OFHEO chart? The housing bubble, which peaked in the spring of 2007, and the ensuing bust is unprecedented since, well, the Great Depression. And it isn't over yet by a long shot.

Thirdly, only when the median home price/median household income ratio reaches long run equilibrium in each of the metropolitan statistical areas in each of the states can you safely declare that the real estate bubble is over. Ponder this.

At 8/24/2008 12:26 PM, Anonymous Anonymous said...

Houses as savings is a natural reaction to having cash savings taxed and inflated away. The real return on two year treasuries is now -3% using the govmnt's numbers. That's a good proxy for savings in general. Saving cash that evaporates at 3% a year is no way to fund a retirement.

Other than a house, what else does the poor worker bee have to deal with decades of savings and investment destructive government policies on taxes and inflation?

At 8/24/2008 4:19 PM, Anonymous Anonymous said...

Well Fred, the worker bee over time should diversify.

1.Buy a house and pay off the mortgage advanced from Fannie/Freddie; soon to be the US treasury.

2. Sock some savings away in bank certificates of deposit (I hear that the FDIC pays nice interest while they wind up the second largest financial bankruptcy in US history - Indymac)or US treasuries because negative real interest rates don't last forever.

3. Buy some domestic and foreign equity index funds (Vanguard is a good start).

4. Buy some commodity funds (purely for diversification, not for rate of returns).

5. Pay off consumer debt.

Do you have any further suggestions?

Addendum: Do not follow the advice of Carpe Diem. Libertarian academics are crybabies - they salivate (privatize) market gains and spittle (socialize) market losses.

At 8/24/2008 8:11 PM, Blogger Mark J. Perry said...

Virginia is there on the list, it's a "maybe."

At 8/24/2008 8:16 PM, Blogger Kraut said...

I'm wondering why Michigan is in the "maybe" category when their chart doesn't look much like any of the others in that category. There is no extremely steep run-up in prices like in Hawaii, for example. It looks more to me like price decreases as a result of something else (economy in Michigan?) than something like a bubble.

I'd also argue that a few that are labeled as "no" may yet be bubbles ... look at some of the very steep increases in price with some leveling off ... they may yet "crash" as opposed to remaining flat.

Check out:

Washington (seems very steep over the last few years)

Maine (a bit steep over the last few years ... may not crash, just "correct")

Delaware (again, steep since 2001)

At 8/25/2008 12:49 AM, Blogger OBloodyHell said...

> No Virginia?

Yes, Virginia. There is a Santa Clause in the housing bubble...

At 8/25/2008 12:04 PM, Blogger John Thacker said...

Secondly, on a national basis, May 2008 house prices have retreated to the November 2005 level.

Yes, on a national basis. But not in 40+ states it hasn't. Even in Virginia, where it may be down to 2005 levels in Manassas or Centreville, it hasn't come close to reaching the November 2005 level yet in the state as a whole.

The OFHEO chart linked that says that US home prices went down 4.8% in 12 months? Note that it says they went down an astonishing 14.5% in the Pacific states alone, and in some regions they even rose by small amounts.

Of course, it looks much worse in Case-Shiller because that one's price-weighted, and homes in expensive areas have fared worse.

Thirdly, only when the median home price/median household income ratio reaches long run equilibrium in each of the metropolitan statistical areas in each of the states can you safely declare that the real estate bubble is over.

In every metro area in every state? You don't think it would be significant if just the vast majority of areas were?

I look at the Excel chart you list and I see that in every metro area in NC listed-- Charlotte, Greensboro-High Point, Raleigh-Cary, and Durham-- the home price/income levels were well within norms even in 2006. And that's with lots of immigration (domestic and foreign) into NC in that time.

That says to me that you just can't ignore regional effects. There's a regional crash right now, but in large enough (and wealthy enough, for Case-Shiller) areas to affect the entire nation.

At 8/25/2008 12:14 PM, Blogger John Thacker said...

In fact, anonymous, I assume that you agree that there definitely is no bubble in North Carolina, since even by your favorite metric home prices aren't high and never were high.

The same is true of Texas, where median home prices per income were actually lower in 2006 than in the early 80s in several of the big metro areas. (High TX home prices in the early 80s were domestic oil boom related, I believe.)

It's worth attempting to come with a theory why these states (and others) weren't affected by the bubble. I'd argue partially that it's regulation-- areas where the time between starting planning a building and finishing is greater are more likely to have wild swings in price, because supply reacts slower to changes in demand. Only just a theory, though. (Yes, I know that Arizona and Nevada built lots of housing. But if you look at the numbers, they really didn't build much compared to the rate of population increase, and it's the time it takes housing to get finished that makes a big difference in volatility.)

At 8/27/2008 9:54 AM, Anonymous Anonymous said...

Uh, just change any of the graphs to YOY % change and things become quite obvious; its a bad situation; no liquidity. Prices are down in virtually EVERY market. How MP can deny that is beyond me.

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