I decided to do the following exercise. Let us assume that house prices where fundamentally correct at the end of 2002 (I actually think this to be true), and four percent house price growth per annum is sustainable over the long run. Then how much would prices have to change from where they are now to get to the four percent growth path?
Here is what you get:
Phoenix -26.7%
Los Angeles -27.0%
San Diego -9.8%
San Francisco -11.7%
Denver 13.9%
Washington DC -20.9%
Miami -26.5%
Tampa -20.3%
Atlanta 6.5%
Chicago -4.6%
Boston 6.7%
Detroit 33.5%
Minneapolis 6.3%
Charlotte -1.3%
Las Vegas -26.5%
New York -12.5%
Cleveland 18.3%
Portland -24.7%
Dallas 13.2%
Seattle -24.7%
This says Denver, Atlanta and Minneapolis are OK, and Chicago is close to OK. Boston was probably overpriced in 2002 (see my paper with Chang and Cutts), but I find it plausible that it is near bottom, because it started its downturn before other markets. Four percent nominal growth is not in the cards for Detroit and Cleveland, and Dallas has never had a lot of house price growth, so don't get excited about their positive numbers. Florida, Las Vegas, Los Angeles and Washington appear to have a way to go (although Washington and LA are very fragmented, a point I will get to in another post). I am not sure whether the Pacific Northwest is seriously overpriced, or whether it, like San Francisco, can sustain higher house price growth than the rest of the country.
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3 comments:
Dude,
You have to figure in the desirability of the area. That includes employment, weather, recreational opportunities. I don't think Detroit is 30+% undervalued, it's just not going to have the draw to get better than 4% a year.
Interesting. For a similar methodology on the Westside of Los Angeles that suggests around a 40% drop, see here.
The only hope for the glamour markets is sustained buying by overseas investors / second home purchasers. For would be first time home buyers this will be terrible news - elevated prices with less supply available to citizens - but that's what the politicians are aiming for. The dollar's demise is the primary tool.
That said, remember that even 4% annual growth on a repeat sales, quality adjusted basis is 1.5% real assuming a 2.5% inflation rate. That's darned good for real estate on average and better than Shiller's long term U.S. calculations.
I have one lingering question: If housing is included in CPI (via owner's equivalent rent) how can home prices rise faster than inflation over the (very) long term?
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