Isn’t there just one U.S. real estate market, with prices that move up and down in unison? Or at least one Bay Area real estate market that marches in lockstep?
Or put another way, isn’t the idea that all real estate is local, down to the neighborhood level, just a myth promulgated by your local real estate professional to persuade you that “it can’t happen here” because “our market is different”?
Like all runners, all real estate markets are the same.
This conspiracy theory seems popular among academic real estate economists, and even among economists who venture outside the ivory tower of academe.
One of the latter, Christopher Thornberg, formerly of UCLA, boosted his then-new consulting firm Beacon Economics with a dire warning in early 2008 that California home prices were “going to fall 35 percent in the state and in the Bay Area” during what would shortly become known as the Great Recession. Well, maybe not 35 percent. “I suspect they are going to fall between 25 and 30 percent before this is all over”.
Whatever percentage he liked, they didn’t–prices fell by as much as 60 percent in the Central Valley, and by as little as 18 percent for “entry-level” Palo Alto single-family homes according to my calculations–but no one seems to remember this, and if they do, they don’t care, because as the Los Angeles Times said in 2013, Thornberg’s “prediction led to lots of work for the newly started Beacon”.
In a 2008 Times opinion piece, Thornberg scoffed at “‘experts’ out there…who preach that all real estate is local and that prices in your neighborhood won’t be affected by foreclosures and price declines elsewhere”. As I said at the time, “this certainly simplifies the study of real estate economics. Rid the field of one pesky nuance and all the economists get to go home an hour early”.
I was reminded of all this–and that economist hubris used to irritate me far more than it should–by a recent posting on SocketSite that includes a chart based on S&P/Case-Shiller Home Price Index data. It’s a dandy chart, showing home price movements since 1987 in the San Francisco Metro–including the Peninsula, North Bay and East Bay– in the bottom, middle and top thirds of the price range.
In other words, the chart tracks price movements in local affordable, midrange and top-end neighborhoods, distinctions that according to economists like Thornberg, either don’t exist or don’t matter. No, to hear them tell it:
- the real estate market is small “d” democratic
- home prices are just home prices, equally subject to the whims of fate no matter where you live, and
- despite what your agent says, your neighborhood won’t be an island of (relative) serenity in an ocean of declining home prices, sheltered by trivial and artificial distinctions such as location close to jobs and schools with a good reputation
My private island. Bill Gates, eat your heart out.
Since the chart is copyrighted, I won’t post it here, but you can see it by going to the site. And, by God, what it shows is that:
- home prices in the bottom third of the SF metro’s price range, always the most rate-sensitive part of the market, climbed during the 2001 recession as Greenspan lowered rates, while cheap mortgages weren’t enough to juice the middle and top third ranges still mired in their dot-bust slump
- while all three price ranges took off like a rocket in 2002, bottom-third prices had a steeper trajectory that climbed higher relative to middle and top third price appreciation–because subprime lending, confined largely to affordable neighborhoods, created a bubble in those neighborhoods, pumping up prices far beyond their true market value
- top-end homes appreciated more slowly than bottom and mid during the mid-2000s boom because by then the typical dot-com top-end buyer, a customer support rep with a suitcase full of stock options (I’m kidding, a little) was either bagging groceries or back in Cleveland; in other words, the top end was weaning itself off Monopoly money
- while home prices in all three ranges did decline during the downturn starting in 2008, bottom-third prices plunged more and didn’t return to their pre-boom correlation with mid and top until 2013; in other words, bottom-third prices were artificially high during the boom, and artificially low during the bust
- and the chart also confirms something I picked up on in my December newsletter: that affordable single-family neighborhoods appreciated significantly more in 2017 than did mid and top-end neighborhoods
Convincing evidence that all real estate is local, even the real estate in one metro.
So, kids, instead of being skeptical when your agent tells you “location, location, location”, take whatever the real estate economists tell you with a large grain of salt.
© John Fyten 2018