Which way are housing markets going? The recent national-level indicators have looked pretty bleak for housing bulls. Sales of new homes hit a record low in July. House prices in June topped their levels of a year ago but only, it seems, because of the now-expired federal homebuyer tax credits.
There’s a lively debate about whether housing prices will continue to fall, and David Leonhardt summarized the controversy nicely in his New York Times column last week. But this debate misses an important part of the story. Because housing markets are regional, not national, there may not be a single answer to whether housing is overpriced or underpriced. It may be overpriced in some metropolitan areas and underpriced in others.
That’s exactly what Richard Shearer and I find in the latest edition of Brookings’ MetroMonitor. We compare average house prices in 96 of the 100 largest metropolitan areas with what prices would have been if there had been no housing bubbles since 1999 and prices had just risen in line with economic fundamentals (interest rates, metropolitan employment, and metropolitan wages). In 30 of the 94 metropolitan areas, we find that house prices in the second quarter of this year were within 2 percent of what they should have been—for all practical purposes, neither under- nor overpriced. In another 41 metropolitan areas, housing was overpriced by between 2 percent and 9.6 percent. In the remaining 41 metropolitan areas housing was underpriced by between 2 percent and 9.3 percent.
Which places were which? I was surprised by the answers, which you can see on the map below. I thought that the metro areas that had the biggest housing bubbles still had the most overpriced housing and that house prices were, if anything a bit too low in the coastal Northeast. I thought prices were probably in line with economic trends in both the depressed Great Lakes auto manufacturing areas and the parts of the nation’s midsection (Texas and the Great Plains) where the recession had done the least economic damage and there were no housing bubbles. All this was precisely wrong.
Instead, the metro areas with the biggest housing bubbles were split between places where house prices remained too high (such as Los Angeles and Tampa), those where they were too low (such as Boise, Las Vegas, and Sacramento), and those where they were about right (such as Orlando). Bubbles hadn’t yet fully deflated in the first group of metro areas, while in the second group they had popped and prices had actually fallen too far.
In the Northeast and mid-Atlantic, where housing bubbles were small or nonexistent and the overall impact of the recession was mostly in line with national averages, house prices were too high in Baltimore, Boston, Providence, Washington, and several smaller metropolitan areas. But in Hartford, New York, and Philadelphia, among other places, house prices were about right.
In most of the hard-hit Great Lakes auto centers, house prices had fallen more than they should have, even considering the depressed job and wage situation. Housing was underpriced in Akron, Cleveland, Dayton, Detroit, Milwaukee, and Toledo, although the price was right in Grand Rapids. The large overhang of foreclosed houses in many of the depressed Great Lakes metro areas probably helped push prices down in those places.
Texas and the Plains were a mixed bag. House prices were too high in Austin, El Paso, and McAllen, too low in Kansas City, Omaha, and San Antonio, and about right in Dallas.
Does this mean that house prices will rise in places where housing was overpriced and fall in those where it was underpriced? Should you be a bear in Boston and a bull in Boise? If economic conditions remain pretty much as they were in the second quarter of the year and if there are no unusual local circumstances that could affect house prices, then you should. But be prepared to wait a while before prices start to move in the direction you’d expect them to; housing markets don’t turn around on a dime. And if you’re in a metro area where there have been a lot of layoffs in the last few months, or one where wages have dropped precipitously, or one where there are still a lot of foreclosed houses sitting on the market, then you should be a bear, at least for the short term.