Though home prices in many areas still have room to drop, economists say some of the country’s real estate markets are showing early signs of repair. A two-year slide in values has eased its stomach-turning pace, and some analysts expect the national market to bottom out by mid 2010.
That’s the good news.
See the top 5 cities where home prices will rise
But just as subprime lending, the housing bubble and the country’s subsequent wave of foreclosures had distinct consequences in separate areas of the country, the recovery will also look dramatically different by region.
When prices do rise, they’ll inch, rather than soar, and some areas won’t match their pre-bubble prices for a decade, according to home price forecasts by Moody’s Economy.com.
In cities in Florida, such as Miami and Orlando, housing prices peaked late, leaving ample time for developers to go on a building bender. This has resulted in a bloated inventory. As a result, these areas may have a long wait before real estate costs level out. In Texas metros like Houston and Dallas, sustained economic health and less exposure to the 2004-2006 run-up in prices are expected to help homeowners there weather the bust better than most.
Behind the Numbers
Moody’s Economy.com provided Forbes with a housing price forecast for the country’s 40 largest metropolitan statistical areas (or metros)–geographic entities defined by the U.S. Office of Management and Budget for use in collecting statistics. The forecast predicts the percent change in home prices over one year, three years and five years, using data from the S&P/Case-Shiller Home Price Index. In the MSAs for which Case Schiller does not publish numbers, Moody’s used a weighted average of metropolitan divisions within those areas.
Moody’s calculates future changes in home price by measuring both long-term demographic and economic fundamentals, like income and population changes; and changes caused by short-term supply and demand shifts.
Housing Swings
The data provider’s forecasters evaluated not only the relationship between such drivers in each metro, but the effect of overlying economic principles. Typically, prices will continue on the trajectory they are on, a trend that economists call persistence.
“When people see prices rising, they think housing is a good investment,” says Celia Chen, Moody’s Economy.com research staff senior director, specializing in housing economics. For some time afterward, these buyers will bite, helping to push prices even higher.
But, “sentiment can turn when prices are proceeding very quickly,” says Chen, referring to post-bust buyer reaction. “At some point people can think, ‘it’s not realistic, nothing is supporting this increase,’ and there’s a drop in demand for housing.”
Moody’s predicts a 16.08% decrease in prices nationwide by the end of the year. By 2012, however, prices will be 3.7% above 2009 levels, and by 2014 they will have nearly reverted to their pre-2009 state.
The Crisis in the Country’s Metros
But nationwide data doesn’t tell the whole story. To understand the effects of the crisis one must examine thousands of micro-economies.
“This whole cycle didn’t play itself out uniformly across the country in magnitude or timing,” says Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. “All housing markets are truly local. They’re a function of the structure of the local economy.”
Moody’s data show how prices will move relative to where they are now. Thus the depths to which prices have fallen in many metros means that what looks like a dramatic recovery may only reflect a prior correction that was just as severe.
In San Jose, for example, the five-year forecast calls for a 23.04% jump in prices. That sounds impressive until you note that at the one-year mark, prices will have fallen by more than that–25.14%.
But the numbers are useful for sketching out the potential shape of a recovery, and many experts agree with Moody’s outlook.
“Recent trends show a slowing of declining prices and the formation of a bottom,” says Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School. But she stops short of heralding a new real estate boom. “The big picture here is that there’s no rebound. I think it is in fact far more likely that we will see an L-shaped outcome.”
Trouble in Florida While Texas Holds Steady
That L shape is evident in Florida. Miami, Orlando and Jacksonville are three of only six cities Moody’s predicts will still see home prices falling, albeit modestly, after five years. Values will have dropped 2.93%, 3.58%, and 1.01%, respectively. Overbuilding, a population that is growing at its slowest level since the 1970s and a weak local economy have sucked the demand from cities like Miami’s housing market.
“Miami’s got the worst of both sides of that supply and demand equation,” says Snaith. “Growth is not going to come back with a bang.”
Although prices in Austin and San Antonio are also expected to have dropped mildly five years out (by 0.57% and 1.01% respectively), the reasons for, and implications of, this drop are quite different. These are also the only two cities expected to see prices rise this year; their home price correction will be late, and gentle. Texas metros Houston and Dallas will only see modest drops by the end of the year and a small lift five years out.
Texas in many ways dodged the housing bust and the recession as a whole because of its energy-driven economy and tougher zoning laws that curbed overbuilding.
“The market didn’t get as inflated as it did in other parts of the country,” says Chen. “I think what’s going on in Texas metro areas is that it’s having a bit of a lag in terms of correction.”
But even Texas housing is not immune to price swings.
“Declines in Texas were the biggest in history prior to this cycle,” says Eric Belsky, executive director of the Joint Center for Housing Studies of Harvard University. “They occurred even though they didn’t have a big run-up in prices or significant job loss; what happened there was that the Savings and Loan associations stopped providing loans.”
Systemic Problems in the Midwest, Mixed News in California
Midwestern cities will see a grim housing future for reasons that are neither temporary nor cyclical.
“Generally speaking the industrial Midwest has been hit very hard by the housing downturn, because the manufacturing economy has been very troubled and areas there have shed many jobs,” says Chen. “The decline in population has also weakened housing markets.”
Detroit, whose housing problems are inextricably linked with the decimation of the auto industry, will have barely seen housing prices claw back to their 2009 levels after five years. In Minneapolis, housing will still be nearly seven percentage points lower after five years than where it was in 2009.
The micro-economies on the West Coast show yet another angle of the housing crisis. Here, where housing prices rose dramatically and subprime lending peaked earlier than in other parts of the country, home prices will likely rebound after five years. Seattle, San Francisco, San Diego and San Jose are poised to see the highest percentage increases in home prices at the five-year mark, but all will see prices fall substantially by the end of this year.
“California won’t rebound sooner, but growth rates look stronger than average,” says Chen.
New York — A Unique Market
Just like California, the New York metro area’s housing troubles have followed a different schedule than the rest of the country. But New York’s pain is just beginning, while California’s is winding down. The metro’s housing prices are expected to plunge 13.08% by the end of the year, and only creep back up by 4.29% after five years.
Housing declined only modestly there until last year; but after the near-collapse of the Wall Street economy, that decline accelerated. New York is now expected to lag behind the nation in recovery.
“We expect it to be one of the last markets to come back; something on the order of a Florida market,” says Chen.
The forecasts show a spotty and relatively weak recovery. To make matters worse, even the forecasters concede that predicting home-price increases is harder than ever. Economists are used to drawing on history to predict the future; but a housing cycle this dramatic is unprecedented.
“Forecasting is part art and part science,” says Snaith. “And in the recent environment, it has to be more Salvador Dalí than Milton Freidman.”
Where Home Prices Are Likely to Rise
© iStockphoto.com |
Atlanta, Ga.
Percentage Change:
1 Year, 2009: -14.91%
3 Year, 2009-2012: 0.98%
5 Year, 2009-2014: 11.35%
© David Lewis/iStockphoto |
Austin, Texas
Percentage Change:
1 Year, 2009: 0.29%
3 Year, 2009-2012: -1.54%
5 Year, 2009-2014: -1.01%
© Jeff Wilkinson/iStockphoto |
Baltimore, Md.
Percentage Change:
1 Year, 2009: -13.32%
3 Year, 2009-2012: -3.33%
5 Year, 2009-2014: 9.22%
© ShutterStock |
Boston, Ma.
Percentage Change:
1 Year, 2009: -9.75%
3 Year, 2009-2012: 4.48%
5 Year, 2009-2014: 20.44%
© Dave Raboin/iStockphoto.com |
Charlotte, N.C.
Percentage Change:
1 Year, 2009: -8.15%
3 Year, 2009-2012: 3.54%
5 Year, 2009-2014: 12.20%
Click here for the full list of Where Home Prices Are Likely to Rise
Moody’s Economy.com provided Forbes with a housing price forecast for the country’s 40 largest metropolitan statistical areas (or metros)–geographic entities defined by the U.S. Office of Management and Budget for use in collecting statistics. The forecast predicts the percent change in home prices over one year, three years and five years, using data from the S&P/Case-Shiller Home Price Index. In the MSAs for which Case Schiller does not publish numbers, Moody’s used a weighted average of metropolitan divisions within those areas.
