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Your City’s Housing Boom Could Go Bust

The three most important things when it comes to the value of your home are still location, location, and location.

Americans who fear that the gains from the pandemic real estate boom will be wiped out by the rise in interest rates can take solace in the fact that house price declines nationwide are very rare. Depending on where you live, you may have reason to worry. Regional house price falls are more common than national ones and often hurt local economies. With prices soaring in so many places, many real estate markets could be ripe for defeat.

The combination of pandemic-induced housing demand and ultra-low mortgage rates did wonders for house prices. Even as rates started to march higher this year, prices continued to rise. In June, the S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the country, was 45% higher than in February 2020.

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Even without the rise in mortgage rates, the rise in house prices would affect people’s ability to afford a home. Higher rates priced more potential buyers. A measurement from the National Association of Realtors, based on mortgage rates, median household income, and the median sales price of existing homes, shows that homes were even less affordable in July than at the height of the housing bubble in 2006. The Federal Reserve Bank’s constructed measure of Atlanta, based on CoreLogic’s home price figures and additionally including tax and insurance costs in the calculation, shows affordability in July lower than it was in 2006. Freddie Mac reports that the average rate on a 30-year fixed mortgage hit this week. .29% – up from the 5.54% average in July and the highest level since October 2008 – houses are now even less affordable.

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Affordability issues have put a damper on the housing market. On Wednesday, the National Association of Realtors reported that August seasonally adjusted sales fell for the seventh straight month and the unadjusted median home sales price was 7.7% higher than a year earlier, compared to 9.5% in August. July. Still, a significant national decline in house prices, such as the one that sent the Case-Shiller index plummeting from its high in July 2006 to its low in February 2012, may not be forthcoming.

The easy financing for subprime borrowers that helped fuel that bubble was not a factor in the pandemic rally, and the mortgage derivatives that helped accelerate the 2008 financial crisis are no longer around. In addition, while investment buyers have played a role in driving up prices, speculation appears to play less of a role than increased demand and low supply of homes for sale. In August there were only 1.3 million existing homes on the market, compared to 3.8 million in August 2006.

Finally, home prices are sticky on the downside: Unless their circumstances call for it, many homeowners simply won’t sell if their demand isn’t met. Inflation can, of course, reduce a home’s true value, but according to data compiled by Yale’s Robert Shiller (the Nobel Prize-winning economist who co-constructed the Case-Shiller indices with the late Karl Case), the only time since the Great Depression was US home prices (not adjusted for inflation) have fallen significantly on a national basis during the housing crisis.

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But regional declines in house prices are a more regular feature of the economy. For example, house prices in oil-producing states, including Texas and Oklahoma, fell during the drilling failure of the 1980s. Federal Housing Finance Agency indices show that prices in the Houston area fell 23% from 1982 to 1988. California home prices fell in the early 1990s, as did New England prices after the ‘Massachusetts Miracle that made Governor Michael Dukakis the Democratic presidential candidate in 1988 fell flat.

Given how far prices have risen in some places and how unaffordable homes have become as a result, the possibility of a round of regional declines should not be discounted, especially as the Federal Reserve’s rate hikes continue to weigh on the economy. The desire for more living space as a result of the pandemic, low rates and, in some places, an influx of out-of-state buyers who moved to cheaper or sunnier areas during the early stages of the pandemic caused prices in some cities to drop. got higher. CoreLogic figures used by the Atlanta Fed show that in July the three-month moving average of median home prices was up 62% from February 2020 in the Austin, Texas area, 66% in Phoenix and 67% in Tampa, Fla., for example.

People’s ability to buy houses in such areas has become severely limited. For example, in the Austin area, where the moving average for the cost of a home with an average price in July was $497,623 by the measure it applies, the Atlanta Fed estimates that monthly interest, insurance, and tax payments are $3,385-49%. would amount to the average monthly income of the household in the area. Before the pandemic, the Atlanta Fed viewed Austin homes as “affordable”; now they are less affordable than homes in the chronically expensive Boston area.

This is not to say that house prices in Austin — or Tampa, or Boise, Idaho or Nashville, Tennessee, or any of the many places where house prices have risen since the pandemic began — are destined to fall significantly. But there is a risk that they will, and that is a risk to their economies as well. Housing booms can have spillover effects: For example, people spend more on household items, while demand for construction workers and other home-related labor rises, driving up wages. In busts those advantages unravel.

Mr. Case’s investigation of the Boston boom in the 1980s helped spark Mr. Shiller’s interest in housing bubbles. When Massachusetts entered a deep recession – the unemployment rate went from 3.1% at the end of 1987 to 9.1% at the end of 1991 – Mr. Linking it to Boston’s advance, Case wrote that it “greatly boosted the economic prosperity and adversity of the Commonwealth and the region.”

All real estate is local; recessions can be too.

Write to Justin Lahart at [email protected]

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