housing market

Single Family Houses Sales Up, Builders Register Confidence

Wendell Cox — Tue, 20 Nov 2012 17:26:35 -0500

A continuing increase in new single-family house sales has fueled the substantial increase in the NAHB/Wells Fargo Housing Market Index (HMI) to 46 in November. This indicates that nearly one half of surveyed home builders are positive about future sales of single family houses. This is a strong increase from the HMI of 41 in October. The HMI had reached its low point in the midst of the housing bus in January 2009 at 8 and is now higher than at any point in more than six years.

NAHB reported that national single-family house sales in September were nearly 30% above the September 2011 rate, though remained approximately one-half the 2007 rate.

The National Association of Realtors also reported that single family houses continued to dominate existing house sales, garnering approximately 88% of sales in October.

The strengthening of the single-family housing market Is to be expected as the economy improves. These developments are further indication that the claimed change in housing preferences from single-family to multifamily is not occurring. In a related development, the latest available data indicates a preference in California for single-family housing on conventional sized lots, which is described in A Housing Preference Sea Change: Not in California.

Things Aren't that Bad in Saginaw

Wendell Cox — Tue, 24 Jan 2012 23:05:30 -0500

Our 8th Annual Demographia International Housing Affordability Survey included the Saginaw, Michigan metropolitan area, which we noted had the lowest Median Multiple (median house price divided by median household income) among the included 325 metropolitan areas. This made Saginaw the most affordable metropolitan market, principally due to depressed economic conditions. Saginaw has been ravaged by the loss of manufacturing jobs and a generally declining economy because of its strong industrial ties to the Detroit metropolitan area.

D. Robertson of Freeman's Bay (Auckland, New Zealand) must think that things are much worse, as indicated by a letter to the editor in the New Zealand Herald on January 24 (The Herald does not post letters to the editor on its internet site). Robertson says that including and prominently reporting the result of Saginaw Michigan (population 297 in 120-odd dwellings) was inappropriate. Robertson makes a 99.9% error, having apparently confused Saginaw, Missouri (population 297) with Saginaw, Michigan. According to the 2010 US Census, the Saginaw metropolitan area has a population of 200,169. That would be substantial enough to qualify Saginaw as one of New Zealand's largest metropolitan areas if it were there.

Why Housing is So Expensive in Metropolitan Washington

Wendell Cox — Fri, 20 Jan 2012 10:57:25 -0500

Anyone familiar with housing affordability in the Washington (DC-VA-MD-WV) metropolitan area is aware that prices have risen strongly relative to incomes in the last decade.

However, a recent Washington Post commentary by Roger K. Lewis both exaggerates the contribution of higher construction costs and misses the principal factor that has driven up the price of housing: more restrictive land-use regulations.

Lewis compares construction costs in the early 1970s to current costs and finds that they are approximately 6 times as high. However, when the R. S. Means construction cost index for locations in the metropolitan area are adjusted for inflation, the increase is more like 15% (1970 to 2007).

Lewis also indicates that construction costs have risen faster than the "relatively flat income curve." In contrast, Census Bureau data indicate that median household incomes in the Washington metropolitan area have increased more than 30% since the early 1970s, after adjustment for inflation. House construction costs are the flatter of the two, not incomes.

While Lewis' focus is affordable housing, costs in this low income sector are impacted by many of the same factors that drive overall housing affordability (overall house prices relative to incomes).

Lewis does not consider the huge cost increase in the non-construction costs of housing. In the Washington metropolitan area, we have estimated that the land and the regulatory costs for a new house have been driven to more than 5.5 times the level that would be expected in a normal regulatory environment (see the Demographia Residential Land & Regulation Cost Index). The problem is that the restrictive land-use policies, such as the Montgomery County agricultural reserve, similar regulations in other metropolitan area counties and the large lot building restrictions in Loudoun County have driven the price of land up substantially, and with it, the price of housing. We estimate that more restrictive land use regulations have driven the price of a new house up approximately $75,000.

Not surprisingly, Washington's Median Multiple (median house price divided by median household income) remains more than a third above the 3.0 historic norm, at 4.0, even after the burst of the housing bubble. So long as governments in the Washington, DC area continue to strictly ration land for development, higher than necessary costs will continue to plague both housing affordability and affordable housing.

How Phoenix Housing Boomed and Busted

Leith van Onselen — Sun, 06 Nov 2011 22:55:54 -0500

When analysing the US housing bubble, four states stand-out for the way in which home values rose into the stratosphere before crashing and burning: California, Nevada, Florida and Arizona (see below chart).

Since I covered three markets were covered in previous posts at Macrobusiness (see above links), I now want to analyse the Arizona housing market – with particular emphasis on its largest city, Phoenix – to determine why prices bubbled and then burst in such a violent manner.

In the lead-up to the crash, Phoenix’s economy was booming. New jobs were being added at a fast pace and per capita incomes were growing strongly:

With confidence riding high on the back of seemingly solid fundamentals and rising asset prices, along with easy access to credit, Arizona households borrowed heavily. Per capita debt accumulation surged in the mid-2000s to levels far in excess of the national average:

But Phoenix was living on borrowed time. With the national economy turning south in the wake of the sub-prime crisis and the collapse of Lehman Brothers, Phoenix home prices, which had already been falling gradually, began to slide fast. After home prices peaked in May 2006, it took another 18 months before Phoenix’s unemployment rate began rising:

The rest is history. Home prices continued falling, unemployment kept rising, and nominal per capita incomes fell for the first time in at least 40 years.

And the pain is widespread, with around one in seven mortgages 90 days in arrears – well in excess of the national average:

So what went wrong? Could anything have been done differently to prevent the housing bubble/bust?

Certainly, if credit was less readily available, households would have been constrained in their ability to bid-up prices. But easy credit was only part of the problem. Another key driver of the rampant price escalation and then collapse was the way in which land was supplied for housing.

Throughout the 2000s, Arizona was one of the fastest growing metropolitan area in the United States with more than 1,000,000 population (see below chart).

However, despite there being ample developable land on the urban fringe to accomodate this population growth, the actual quantity of land available for development was heavily restricted on two counts:

The State of Arizona passed statewide planning laws in 1998 and 2000, which included the implementation of high impact fees on new development and urban containment devices. In a 2006 study of land-use policies in the 50 largest metropolitan areas of the US, the Brookings Institution ranked Phoenix as ‘growth management’, which is the same ranking as Florida and California.
The overwhelming majority of potential developable land in Arizona is either owned by the state and federal governments, preserved for conservation, or otherwise off-limits to development.

On the second point – the lack of available land for development – the below graphics highlight the land supply situation in Phoenix.

First, a pie diagram, extracted from the Arizona State Land Department Annual Report, showing how only 17.5% of land in Arizona is privately owned:

Second, a map showing the lack of developable land around Phoenix:

There is evidence that the Arizona State Land Department, whose mission is to “optimize economic return for the Trust beneficiaries”, heavily restricted sales of land to the market in an effort to maximise revenues, causing builders and developers to bid-up land price in period auctions to ensure their supply of land for construction (called ‘land banking’).

Whereas the price of land for housing sold for around $40,000 per acre immediately prior to the bubble, at the peak average land prices fetched nearly $200,000 (see below chart).

And with the state rationing the supply of fringe land, average residential land prices rose throughout Arizona:

Obviously, this land price inflation was a principal cause of the house price escalation as well as the delayed supply response to the rapidly growing population and rising house prices (see below chart).

Had land around Phoenix been freely available for development, developers would likely not have paid such high prices for the land sold by the state government and Phoenix home prices would never have risen to such heights or crashed as violently.

Phoenix is yet another example of where excessive government interference in the supply of land has combined with easy credit to create a speculative bubble followed by a painful bust.

This piece originally appeared at Macrobusiness.

Leith van Onselen writes daily as the Unconventional Economist at MacroBusiness Australia. He has held positions at the Australian Treasury, Victorian Treasury and currently works at a leading financial services company. Follow him @leithVO.

Adelaide Land Prices Top Sydney

Wendell Cox — Mon, 18 Jul 2011 13:05:44 -0400

The median price of serviced (improved) lots for new houses in Adelaide is reported to have risen above that of far larger Sydney by the Housing Industry Association of South Australia. Housing Industry Association of South Australian Executive Director Robert Harding attributed the high price of land to government policies that have limited the supply of land available for building. Nearly all thousands of square miles of land around Adelaide are off-limits to house building due to state government restrictions.

Adelaide is the slowest growing major metropolitan area of Australia, yet has some of the worst housing affordability among larger metropolitan markets. The 7th Annual Demographia Housing Affordability Survey found median priced Adelaide housing to be 7.1 times median household incomes, ranking the metropolitan area eighth most unaffordable out of 82 with more than 1,000,000 population.

Before the adoption of its strong smart growth (urban consolidation) land use restrictions, median house prices in Adelaide were one-half or less the present level (Figure). By comparison, new houses can be purchased in much of the United States for less than the median price of an empty lot in Adelaide ($180,000), though not in areas that have adopted smart growth restrictions.

Home Ownership and the American Dream

Jacob Langenfeld — Thu, 24 Mar 2011 10:26:38 -0400

What defines the American Dream? A new poll by Big Builder reveals that one answer to this enduring question may be home ownership. A major portion of the American population (59%) believes that they are living the American Dream. Respondents distinguished owning a home as the second most important factor of the American Dream, just behind raising a family.

Another statistic in this poll seem to suggest that this trend may be more stifled as the younger generation of Americans (18-29 year olds) come to the crucial decision of buying a home. Still, 49% see home ownership as a “sound investment,” while 49% of this age group call it “too risky.” Perhaps the effect of the weak economy has been especially evident in this age group.

Some interesting contradictions also arise in these statistics. For instance, 58% of those who believe the housing crisis is a chronic problem also recommend buying a home. Furthermore, 75% of respondents claim to not have benefited from any federal program to assist in ownership (such as mortgage interest deduction), yet 71% confessed to taking the deduction. The pollsters have considered that perhaps the government’s assistance in home ownership may be unclear for many Americans.

A final statistic worth mentioning is that 58% of Americans believe that fulfilling the American Dream is influenced mostly by their own skills and hard work than by the current state of the economy. The ubiquitous American Dream still runs on hard work and the pressing notion of owning a home, it would seem.

Housing Crisis in Australia

Kirsten Moore — Sat, 05 Feb 2011 22:53:41 -0500

Even if Australia is a beautiful place to live, it is far from affordable. Results from the Demographia International Housing Affordability Survey show that some of the country’s major cities rank near the bottom of the list of areas with affordable housing. Out of the 325 cities analyzed, Perth ranks 291st, Melbourne ranks 321st, and Sydney ranks 324th. At 6.3, 9, and 9.6 respectively, each one has a median housing price to median household income ratio at least three to six points higher than the 3.0 price to income ratio demarcating affordable from unaffordable housing. Compared to these places in Australia, living in New York or London seems almost reasonable.

Residential property prices in Australia have risen 250% in the past ten years, mainly due to the Government’s concentration on incentives for investors and speculators. A first home buyer’s program and negative gearing incentives for home and property owners have taken a toll on the housing market, creating such “inexcusable” conditions according to Australian Greens housing spokesman Senator Scott Ludlam.

The 2008 Senate Select Committee on Housing Affordability’s investigation into this issue reveals that the Government spent about $50 billion annually on capital gains exemptions and negative gearing incentives, while only spending $512 million over the course of five years to improve the supply of affordable housing. Rental affordability is not much better, as indicated by the gap of 493,000 affordable and available rental properties in Australia.

Ludlam and others have started to call this a “crisis,” an adequate term given migration trends all over the world. Cities with unaffordable housing, such as New York, London, and San Francisco, are losing people moving to the less expensive suburban areas. If Australia continues to have housing bubbles and affordability issues, cities like Melbourne and Sydney may experience high out-migration rates in the coming years, which would not bode well for cities on the rise.

Miami Condo Price Implosion Continues

Wendell Cox — Mon, 15 Nov 2010 01:47:55 -0500

The National Association of Realtors has just published its quarterly median house prices and the trend continues downward in Miami. At the end of the third quarter, the median condominium price had dropped to $82,900 in Miami, about the same as the list price for a BMW-7 sedan. This places condominium prices at 77 percent below the 2007 second quarter median of $367,000.

While Miami has experienced perhaps the most substantial condominium bust in the nation, other metropolitan areas, such as Atlanta, Seattle, Los Angeles, San Diego, Chicago and Portland (Oregon) have seen huge decreases and a spate of spate of distress auctions and conversion of units to rentals.

A recent article in The Wall Street Journal noted that condominiums have experienced an even greater market decline than detached housing. The over-building of condominiums may have been spurred by rose predictions from urban planners about the demand for central city housing being far greater than the supply. For example, the developer of City Center Las Vegas indicated that they built too many condominium units, at least in part in response to information received an urban planning symposium.

Photograph: Condominium Conversion to Rentals in Portland (by author).

Misunderstanding the Bubble and Burst in Sacramento

Wendell Cox — Fri, 13 Aug 2010 15:46:38 -0400

An opinion piece in the Sacramento Bee by Sean Wirth of the Environmental Council of Sacramento could not have been more wrong in its characterization of the causes of the housing bubble in Sacramento.

The article starts out promisingly, correctly noting that:

The housing bubble spawned the Great Recession
Demand exceeded the inventory of houses in the Sacramento area
Sacramento prices "soared sky high"

But it is all downhill from there, with the suggestion that the extraordinary price increases in Sacramento were the result of too much suburbanization (the theological term in urban planning circles is "sprawl"). In fact, all things being equal, house prices tend to escalate where the supply is more constrained, not less. Where suburbanization is allowed, the market can supply enough housing to avoid inordinate house price increases. Where suburbanization is severely constrained, a legion of evidence indicates that house prices are prone to rise. It is all a matter of basic economics. George Mason University economist Daniel Klein puts it this way:

Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical.

Housing is not atypical and Sacramento house prices soared in response to the tough use regulations. By the peak of the bubble, the Median Multiple (median house price divided by median household income) had risen to 6.8, well above the historic norm of 3.0. Many houses were built, but not enough to satisfy the demand, as Mr. Wirth indicates. Building many houses is not enough. There need to be enough houses to supply the demand, otherwise land prices soar, driving up house prices.

Unless a sufficient supply is allowed, speculators and flippers will "smell the blood" of windfall profits, which are there for the taking in excessively regulated markets.

During the housing bubble, house prices rose well above the historic Median Multiple norm only in metropolitan areas that had severe constraints land use constraints (called "smart growth" or "growth management"). This included Sacramento, other California markets, Miami, Portland, and Seattle and other markets around the country.

At the same time, more liberal development regulations allowed a sufficient inventory of housing to meet the demand in high growth areas like Atlanta, Dallas-Fort Worth, Houston and Austin. In each of these places (and many others), the Median Multiple remained near or below the historic norm of 3.0, even with the heightened demand generated by a finance sector that had lost interest in credit-worthiness. As would be expected, speculators and flippers avoided the traditionally regulated markets, where an adequate supply of affordably priced housing continued to be produced.

Wirth expresses understandable concern about the house price losses since the bust. From the peak to the trough, the drop in Sacramento median house prices was more than 55%. However, this is to be expected once a serious economic decline is precipitated, especially in the sector that precipitated the crash (in this case housing). Economists Ed Glaeser of Harvard and Joseph Gyourko of Wharton have shown that not only (1) are house prices higher in more restricted markets but also that (2) there is greater price volatility in more highly regulated markets. Indeed, it is likely that the housing bust would have been much less severe or even avoided altogether if constraints on land had not driven the prices and subsequent mortgage losses so high in California and a few other states that they could not be absorbed by financial institutions. At the time of the Lehman Brothers collapse, 11 "ground zero" markets (including Sacramento), all highly regulated, accounted for 75% of the mortgage losses in the nation, with a per house loss rate of 15 times that of traditionally regulated markets.

Wirth's article expresses opposition to a Sacramento County decision to allow more development to occur on the urban fringe. He would prefer to force development into the existing urban footprint. The economic consequences of such folly are well known. In Australia, such policies have driven led to a doubling or tripling of house costs relative to incomes. The annual mortgage cost of the median priced house has risen to 50% of the median pre-tax household income, in a country that defines mortgage stress at the 35% level. Before the adoption of smart growth policies, Australia's housing affordability was similar to that of liberally regulated markets in the United States.

Avoiding the next housing bubble requires not repeating the mistakes that led to the last. Sacramento's young and lower income households can only hope that the additional land approved by the Board of Supervisors will be enough of a safety valve to keep housing affordable so that they can become owners rather than renters.

Photograph: Sacramento (author)

Evangelicals: Preventing and Causing the Housing Bubble

Wendell Cox — Sat, 31 Jul 2010 10:38:40 -0400

The International Monetary Fund has published some of the most peculiar econometric research in recent history in Irrational Exuberance in the US Housing Market: Were Evangelicals Left Behind? In it, Christopher Crowe associates the financial behavior of Evangelical Protestant Christians with more stable US markets during the housing bubble. It is well known that the housing bubble was concentrated in some metropolitan areas and largely missed others, such as Dallas-Fort Worth, Atlanta, Houston, Indianapolis and many others, most of them with stronger underlying demand than in the metropolitan areas with huge house price increases. Crowe's research raises the possibility that Evangelicals kept house prices down by not speculating, due to their religious beliefs.

Evangelicals generally believe in missionary and conversion activities and tend to hold to beliefs that were largely liberalized in large portions, but not universally in the "mainstream" Protestant churches (such as Episcopal, United Church of Christ, Lutheran, Presbyterian, Methodist, Baptist and Disciples of Christ churches) during the first half of the 20th century. In recent decades, Evangelical churches have grown strongly, Evangelical membership is now 50% greater than that of "mainstream" Protestantism (even with its Evangelical remnants), which has been relegated to "mainstream" in name only.

The Crowe thesis is generally that Evangelicals, allegedly with an "intense" belief in "end times" theology (such as the "imminent" return or the "second coming" of Jesus Christ) were less inclined to speculate in housing, which kept house prices from rising strongly in metropolitan areas with larger concentrations of Evangelicals.

There are some rather substantial difficulties with the thesis.

The first problem is relates to speculation. Rising prices are needed for there to be any incentive to speculate. If, for example, the numerous Evangelicals in Dallas-Fort Worth had undertaken a furious speculative frenzy, prices would not have gone up, instead more houses would have been built. This is because the liberal land use regime in Dallas-Fort Worth permits housing to be built in response to demand and nullifies any potential for speculative gain. Evangelicals, of course, like Catholics, Mainstream Protestants, Jews and Atheists are not stupid and were no more inclined to speculate on housing in the plentiful Dallas-Fort Worth market than they would have been climb over one another to offer higher prices for sand on the beach.

Another difficulty is that Crowe's characterization of Evangelical beliefs is a caricature. In fact, the nation's 40 million Evangelicals, including 15 million Southern Baptists more than 2 million Missouri Synod Lutherans, more than 1 million members of the African Methodist Episcopal Zion Church, non-denominational megachurch members and others behave similarly to other Americans in the economic sphere. Crowe hypothesizes that "that a belief in the end times reduces incentives to save simply because agents put a lower expectation on the future being realized." It would have been equally reliable to conjecture on the subsurface geology of an undiscovered planet.

Evangelicals like nice houses. They like nice cars. They like their children to be well clothed and to go to good schools. They do not refuse raises offered by their bosses because they expect shortly to be caught up into heaven like the prophet Elijah. True, some "end times" Christians have sold their property and trekked to mountaintops or otherwise awaited dates wrongly prophesied by their leaders. It happened in 1844 and in 1914, but these were not Evangelicals.

While Crowe’s research suggests an Evangelical stabilizing effect on housing markets, an opposite, but no less improbable thesis was advanced in an Atlantic Monthly article entitled "Did Christianity Cause the Housing Crash?" This article suggests that the "prosperity" gospel preached in some Evangelical churches led parishioners to take on obligations they could not afford, leading to the bursting of the bubble, though it is mercifully devoid of spurious regressions. Author Hanna Rosin names names, such as Joel Osteen of Houston's Lakewood Church and Rick Warren, whose Saddleback Church in Southern California hosted President Obama as a candidate. It would not be surprising if a future article in The Atlantic pontificated about abandoned suburban megachurches.

One can only wonder what the other nearly 90 percent of Americans were doing while Evangelicals were simultaneously causing and preventing the housing bubble.

Wendell Cox a contributing editor of newgeography.com is the son of an Evangelical clergyman (Pentecostal), became Presbyterian and later an Episcopalian.

Photo: Hollywood Presbyterian Church: An Evangelical Church in a Mainstream Protestant Denomination (by the author).