Are Housing Declines Evenly Spread? - An Examination of California

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To read the popular press, one gets the impression that the collapse of the housing market is concentrated largely in the suburbs and exurbs, as people flock back to the cities in response to the mortgage crisis and high gas prices. A review of mortgage meltdown “ground zero” California indicates the picture is far more nuanced.

California’s metropolitan areas have seen the greatest median house price decreases in the nation. Each of the four largest metropolitan regions, Los Angeles, the San Francisco Bay Area, San Diego and Sacramento have experienced median house price decreases of more than 25 percent over the past year (see Methodology Notes below). These decreases have not been distributed in a way that belies much of the ‘Back to the City’ hype.

Los Angeles: In the broader Los Angeles metropolitan region, the smallest house price declines have been in the inner suburbs --- generally those jurisdictions between 10 and 20 miles from downtown. The inner suburbs have seen a median house price decline of 20 percent. These include wide swaths of employment-rich areas like West Los Angeles, the San Fernando and San Gabriel valleys.

Somewhat surprisingly --- particularly given the hype --- the central areas of LA have suffered a somewhat higher rate of decline, at 22 percent. This includes areas close and around downtown Los Angeles, which has been among the ballyhooed “renaissance areas.” These numbers, significantly, do not include the many new units that were supposed to become condos but, due to lack of qualified buyers, have been thrown onto the rental market.

It is true, however, that, if the condo-to-rental trend is left out, an even higher decline has taken place in the outer suburbs, at 30 percent. The outer suburbs include eastern Los Angeles County, eastern Ventura County, much of Orange County and the Riverside-San Bernardino area. The largest declines of 34 percent were in the “exurbs” --- areas generally far from LA’s archipelago of employment centers and often over mountain ranges. The exurbs include the Antelope Valley, southwestern Riverside County, and the desert areas of Riverside and San Bernardino counties.

San Francisco Bay Area: The situation is somewhat different in the San Francisco Bay Area, home to one of the nation’s most vibrant urban cores, the city of San Francisco. House prices declined less than five percent in the city, a remarkable affirmation of the place’s continued appeal for affluent people.

Overall, the central area --- generally within 10 miles of San Francisco City Hall --- experienced a median house price decline of 15 percent. However, central areas outside San Francisco experienced a price decline of 24 percent, which is only marginally less than in either the inner or outer suburbs. The inner suburbs, which include much of the East Bay, including Oakland and most of the peninsula, experienced a decline of 28 percent.

Outer suburbs --- those beyond 20 miles from city hall, including eastern Contra Costa and Alameda counties and Santa Clara County --- experienced the second lowest decline, at 26 percent. Overall, the largest decline was in the exurbs --- the counties in the San Joaquin Valley to which so many households had fled seeking affordable housing. There, the decline was 44 percent.

San Diego: The San Diego area indicates a fairly constant rate of decline, regardless of distance from downtown. The lowest decline was in the inner and outer suburbs, at 26 percent, while the central area experienced a median house price decline of 27 percent.

Sacramento: Sacramento indicates the most unexpected results, with the central area experiencing by far the largest house price declines, at 42 percent. The lowest house price declines were one-half that rate, in the outer suburbs (generally more than 10 miles from downtown), at 21 percent, while the inner suburbs experienced a decline of 29 percent.

Overall, within the central areas, inner suburbs and outer suburbs of the major metropolitan regions, price declines have been consistent, all at minus 26 percent. The major exception has been the city of San Francisco. However, it is well to keep in mind that the city represents barely 10 percent of its metropolitan region population and is a unique case.

What does all this indicate? Perhaps most of all, it is a further demonstration of the growing irrelevance of what economist William T. Bogart calls the pre-Copernican view of the cities. Most people no longer work in the urban core and living in the suburbs does not necessarily mean longer commutes. This was evident in our previous analysis of metropolitan New York, where the greatest jobs-housing balances are in the suburbs. In fact, the price declines throughout the principal urban areas making up California’s largest metropolitan regions have not been materially different.

Things have been tougher n the far flung exurbs, where the greatest price declines have occurred. This was to be expected. These are places that people fled to find lower-cost housing that had often been precluded in the over-regulated jurisdictions in the principal urban areas. Many such households bought their houses in the most recent cycle, largely because of the unprecedented relaxation of credit standards. The difficulties in the exurbs been exacerbated by the fact that employment bases there have not yet had a chance to catch up with their residential gains.

Notes on Methodology: The data is calculated based upon the change in median house prices from July 2007 to July 2008, based upon data published by DQNews.com. Sector medians are is weighted by the number of house sales. All jurisdictions or geographies are included that had 25 or more house sales in July 2008. Generally, the data is based upon municipal jurisdiction, except in the city of Los Angeles, where geographical data is available and in the case of counties wholly within a zone (central, inner suburbs, outer suburbs or exurban).

The central areas of Los Angeles and the San Francisco Bay Area are considered generally to be located within a radius of 10 miles from downtown, the inner suburbs are between 10 and 20 miles from downtown and the outer suburbs are more than 20 miles from downtown. The exurban areas are described in the sections on the particular areas above. In San Diego and Sacramento, which are considerably smaller, smaller geographic radii are used. The central areas are up to 5 miles from downtown, the inner suburbs from 5 to 10 miles from downtown and the outer suburbs are more than 10 miles from downtown. Because of their smaller geographic sizes, exurbs are not considered in this analysis for San Diego and Sacramento. The city of San Diego is excluded from this analysis because major parts of it are in each zone.

Wendell Cox is principal of Demographia, an international public policy firm located in the St. Louis metropolitan area. He has served as a visiting professor at the Conservatoire National des Arts et Metiers in Paris since 2002. His principal interests are economics, poverty alleviation, demographics, urban policy and transport. He is co-author of the annual Demographia International Housing Affordability Survey.

Mayor Tom Bradley appointed him to three terms on the Los Angeles County Transportation Commission (1977-1985) and Speaker of the House Newt Gingrich appointed him to the Amtrak Reform Council, to complete the unexpired term of New Jersey Governor Christine Todd Whitman (1999-2002).



















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Growth and Overvaluation

I'd guess that the decline in housing prices is roughly proportional to the growth rates in each area. There doesn't seem to be much growth in inner suburbs. The value of inner suburbs is far more certain than either exurbs or inner cities, where new development is far more prevalent. A more tenuous grasp of the actual value of neighborhoods leads to overvaluation, which leads to larger price declines when the bubble bursts. This hypothesis fits the Los Angeles data at least. San Francisco and Sacramento are special cases in that their inner cities are on opposite extremes of the desirability spectrum.

Very good article

Very good because it contains DATA and is well written.

Dave Barnes
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