Ask the Economist: The Great Housing Divergence

Ralph McLaughlin is Trulia’s Chief Economist. He leads Trulia’s housing economics research team and provides house hunters with key insights about the economy, housing trends, and public policy. His educational background includes a B.S. in Geography and Regional Development from the University of Arizona and a Ph.D. in Planning, Policy, and Design from the University of California at Irvine (with a specialization in Urban Development). He has more than a dozen publications and research papers in the fields of housing economics, land use and housing policy, and industrial geography, and was previously director of the Certificate in Real Estate Development at San Jose State University. 

McLaughlin spoke to DS News about the trends seen between the most expensive housing markets and the least expensive markets.

What are the trend you are seeing in home values in the most expensive metros versus in the least expensive metros?

The most expensive metros are growing even more expensive than the least expensive metros, so in other words the housing rich are getting richer while the housing poor are getting relatively poorer. The priciest metros were about two and a half times more expensive than the least expensive metros 30 years ago, but now the most expensive metros are about four and a quarter times as expensive. We really are seeing a sharp divergence between very costly housing markets and the least costly housing markets.

Specifically, what trends do you see occurring in the least expensive metros?

The least expensive markets are growing decently but not as much as the other markets. To put it into perspective, those least expensive metros over the last 30 years have only grown by double at best. Homeowners in places like Dayton, Ohio or Greens Point, North Carolina were lucky to double their house value over 30 years. This may sound like a lot, but if you actually adjust for inflation, you really are not experiencing much real gain in home value over those 30 years in those markets. If you contrast that with the most expensive markets (for example, San Francisco, San Jose, and Honolulu), those markets have seen 400 to 560 percent increase in value over 30 years and that is much greater than inflation and almost as much as the stock market changed in that time. It really is quite a difference between those expensive markets and the least expensive market. Another way to look at this as well is if you take the home value gain from the median homeowner in San Francisco over the last 30 years, that is about $900,000. But if you look a 10 of the slowest growing markets combined they only grew by $630,000 so the median homeowner in San Francisco made more on his or her house than all of the median homeowners in the 10 slowest growing markets. These markets include Rochester, Wichita, Fort Worth, El Paso, Memphis, Dallas, Oklahoma City, Tulsa, Greensboro and Dayton. That really symbolizes the divergence in house prices over the last 30 years.

For the most expensive metros, what do you forecast for home value growth in the future?

History shows that in general anything that grows very fast and grows to be very high priced can’t sustain that indefinitely so at some point there will be a time when most people won’t be able to afford prices in expensive markets. Homeowners and potential homeowners would then look to move elsewhere. We haven’t hit that point yet. We are still seeing strong price growth in the expensive markets, but overall in the last few years, that rate has slowed down and we are starting to see other expensive markets over the last year catching up a little bit. The question is, though, whether or not that will persist enough to bring the least expensive market in line with the most expensive market. At least a 30-year trend is much more of a reliable number than just a one-year trend, so we really have to wait and see whether or not this will play out. There are anecdotal examples of even well paid employees that can’t afford to live where they are currently working so they move to less expensive markets that still do have relatively good paying jobs.

What can be done in your opinion to reduce the gap between these two entities?

I don’t think that gap is really going to be narrowed much if at all and that is for one primary reason. One of the things that explains the difference between the most expensive metros and the least is how much home building occurs. If for example a household decides to move from San Francisco to Austin, Austin builds a lot of homes where as San Francisco does not so that is likely to keep prices relatively high in San Francisco because there is low supply. In places like Austin, if households move there because it’s cheaper, one of the reasons why it’s cheaper is because Austin builds a lot of home and that will likely keep price appreciation from getting out of control. We certainly have seen prices increase in Austin but this reason is part of what has narrowed the rate increase in places like San Francisco, Portland, or San Jose

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