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Inequality is growing among communities, not just individuals

MinnPost photo by Corey Anderson
The Demand Institute is forecasting that median prices of existing single-family houses will grow at an average annual rate of 2.1 percent between 2015 and 2018, an increase that runs only slightly ahead of projected inflation rates.

This just in: A brand-new report on the future performance of the U.S. housing market. Called  A Tale of 2000 Cities: How the sharp contrast between successful and struggling communities is reshaping America,” it analyzes housing market data for states, metropolitan areas and 2,200 of America’s largest cities and towns.

The work was undertaken by the Demand Institute, a non-advocacy nonprofit think-tank jointly operated by The Conference Board and Nielson. The Institute’s purpose, they say, is to provide business leaders around the world with objective information on consumer demand.

The subject of housing values may sound dryer than dry wall, but if you own your home or if you’re thinking of buying one, the issue is pretty critical. Will the dwelling into which you’ve sunk your dough depreciate in value like a car, will it steadily rise like a good mutual fund or will it take you on the roller-coaster ride that ends up with you and your home underwater?

On a macro-level, housing values also measure the prosperity of the community in which you have chosen to live and raise your family. “Drive through any American town, city or village and you can readily judge how well the community is faring by the types of property, their size and condition,” said Louise Keely, chief research officer at the Demand Institute and co-author of the report.

On the way to recovery

The overarching good news is that the nation’s housing markets are well on the way to recovery. Already housing values have rebounded in many markets. But nobody should kid himself that we’ll be returning to the frothy exurban expansion that occurred a decade ago or to double-digit annual increases in value we’ve enjoyed in the past couple of years — which “were largely driven by investors buying up swaths of distressed homes to meet growing rental demand,” according to the report.

Instead, the institute is forecasting that median prices of existing single-family houses will grow at an average annual rate of 2.1 percent between 2015 and 2018, an increase that runs only slightly ahead of projected inflation rates.

Those gains will put national median prices near their nominal 2006 peak, though after adjusting for expected inflation rates, median home prices will still stand 25 percent below that level. (Of course, the bubble prices of 2006 are phony benchmarks, since houses had by that time become grossly overvalued.)

Moreover, those increases will not be uniform. Housing values among the 50 states and the 50 largest metros will vary drastically, with the strongest markets  enjoying price rises three times higher than the weakest.   

State and metro area rank low

So where do we stand? The states likely to see the strongest rise in the median price of an existing single-family home, measured from a market trough in early 2012 to the end of 2018, are New Mexico (33 percent), Mississippi (32 percent), Maine (31 percent), Illinois (31 percent), and New Hampshire (28 percent). Those with the lowest projected price rises are Washington, D.C. (6 percent), Minnesota (13 percent) — gulp! — Virginia (14 percent), New York (14 percent), and Alaska (15 percent).  

Similarly, the Minneapolis-St. Paul-Bloomington metro also ranks low among the top 50 cities — fourth from the bottom, with a projected increase of 12 percent.

Those percentage increase forecasts do not tell the whole story, Keely says. Property in the Twin Cities, for example, is more valuable than property in Memphis, which occupies the No. 1 spot for growth, with the median house increasing in value by 33 percent from 2015 to 2018. But the median cost of a house there in 2018 is projected to be $157,000, while in the Twin Cities, it will hit $201,000. Minnesota — and the metro — may lag behind other areas, says Keely, perhaps because the rise and fall of housing values during the bubble and its aftermath were less precipitous than those of other states.

What’s more striking, perhaps, is the report’s conclusion that when it comes to housing — as with everything else — the rich get are getting richer. The report added up the total value of owner-occupied houses in each of the 50 largest metros and ranked them. As it turns out, the top 10 percent on that list held 52 percent of the total housing wealth – a total of $4.4 trillion. Despite the recession, those communities have experienced a 73 percent growth in housing value since 2000, 51 percent of the increase in income and 49 percent of the employment opportunities.

Note: Median prices of existing single-family homes | Source: The Demand Institute

The gap between communities

The bottom 40 percent held just 8 percent of housing value, or $700 billion worth. In the same 12-year span, they had seen just 9 percent of the increase in income and 9 percent of the growth in employment opportunities. The upshot: There are not only wide gaps in wealth between individuals but also between entire communities, even in the same state or metropolitan region.

How will that play out in the future? Projections over the next few years show property values in the top 10 percent of communities set to rise seven times more than those in the bottom 40 percent — $1.9 trillion to $260 million. For the well-off communities, the increase translates to a virtuous cycle; more property-tax revenues support more public services like schools, parks and mass transit. Those in turn draw more people, and they drive housing values up still further. For poorer towns, the spiral works in reverse. Tax dollars fall, public amenities decline, employers move elsewhere and property values drop.

That rich-getting-richer syndrome spells stasis. Only about a dozen of the 2,200 towns studied moved into or out of the top ranks in recent years. “Absent unexpected developments, it seems highly likely that the weakest communities will lag further and further behind,” write the authors who sorted towns and cities into nine different types, ranging from the successful — so-called “Affluent Metroburbs” — to the troubled or “Endangered Communities.” In Minnesota, only Hibbing ranked as “Endangered.” (You can see where your own town falls on the institute’s interactive maps.)

What to do about the gaps in community well-being? Keely has no ready answer. “Our goal was to shine a light, to help people see inequality at the community level.” The first step toward any change, she adds, is “to understand the landscape.”

Comments (8)

  1. Submitted by Steve Elkins on 02/28/2014 - 01:57 pm.

    Fiscal Disparities is why we don’t have any “endangered” cities in the Twin Cities. it narrows the fiscal capacity gap between “have” and “have not” cities and keeps the latter from going into a property tax “death spiral”.

  2. Submitted by Paul Udstrand on 03/01/2014 - 10:15 am.

    Bubble thinking persists

    I’m amazed at how persistent this bubble thinking is. This is not the first time that Ms. Harris has bemoaned the absence of real estate bubble for some reason and this kind of economic tunnel vision is getting tedious.

    You’re looking at “report” that was compiled for real estate industry and for some reason assuming that what’s good for the real estate industry is good for the real economy. Do we have to point out why the realtors want housing prices to go up, and the more the faster the better?

    Listen, the whole idea that you’re home is a “bank” of some kind should have exploded along with the bubble. Homes are places where people live, the home itself isn’t an income generator. Affordable housing isn’t bad for the economy, in fact it may be good for the economy. You can’t look at a state like MN that’s outperforming the rest of the nation on most economic indicators and claim that lower housing values are limiting our wealth. “Wealth” is not a function of home value, the bubble burst should have taught people that. So your house is worth more than you bought it for, so what? That only translates into real wealth if you sell, and since the point of having a home to live in it, not sell it, what’s the point? What do people do with that equity? They dump it into the new house they just bought and start making mortgage payments again. If you borrow on your equity you’re not realizing wealth your acquiring debt.

    Listen, if you make $30k and live in a house that’s worth three time what you paid for it, you are not wealthy. Donald Trump isn’t wealthy because his house is worth more than he paid, he’s wealthy because he makes millions of dollars a year. This notion that home value make us wealthy is simply an accounting sham. “Assets” don’t make you “wealthy”, wealth makes you wealthy. All this crap about building wealth during the bubble was just smoke and mirrors that convinced a nation of full of people over their heads in debt while making less and less income every year that they were “building” wealth in home values.

    When I see low home prices in MN I see affordable housing. Since median and household income in this country has stagnated and credit is still tight for mortgages affordable housing is good for people, not bad. Home values do not make people in Minnetrista wealthier than people in St. Louis Park. The fact that median household income in Minnetrista is four times higher than that in SLP is what make those people wealthier. If you want to measure wealth, measure wealth. Housing values don’t measure wealth, or economic prosperity. Housing a market, its a sector of the economy, not center of the economy.

    The question isn’t weather or not housing prices are going up, rising prices are only good for realtors and builders and banks. The question is weather or not house prices are affordable relative to household income. Since household income in the US had been flat or even declined for last two decades rising home prices would only mean that people are probably taking on more housing debt than they should. That’s actually bad for the economy because every dollar that goes to the bank isn’t going anywhere else and since we’re not all realtors and bankers and builders that means fewer dollars are flowing towards us. If you want to be wealthy, you have to make a lot of money. The idea that you can make $90k a year and get “wealthy” off your home value is a bait and switch. You can’t buy groceries with your home value.

    If the real economy is solid and growing the real estate sector i.e. your home value will increase modestly, and the longer you stay in your home the more it will be worth. But make no mistake, the real estate sector is the tail, not the dog. If you try to run the economy the other way round by placing house prices at the center, you’ll just create another great recession.

  3. Submitted by Marlys Harris on 03/02/2014 - 12:25 pm.

    I don’t disagree

    As I mentioned, the bubble prices of 2006 are a false, overly frothy benchmark. But home prices can increase modestly, and while nobody should look on his house as a pot of gold, buying and owning one—holding it a number of years—is not exactly tossing money down the toilet either.
    The other element is that a lot of tax money to support municipalities comes from property taxes. If a community’s tax base is on a downward spiral, that usually translates to fewer public services, lousy public schools, avoidance by new buyers and a general decline in well-being. That would not be a good thing even if realtors didn’t exist.

    • Submitted by Paul Udstrand on 03/02/2014 - 11:07 pm.

      Not really

      Marlys, the inflation rate has been below 4% for for over a decade so even the lowest price increases on the chart (5%) will provide adequate property tax revenue unless a city is experiencing massive population loss, i.e. Detroit. 13% in the Twin Cities in nothing to “gulp” at, it’s simply modest. Besides, local tax revenues are a much more complex proposition than real estate values alone.

      The other thing, these non-peer reviewed “reports” from boutique institutes frequently produce dodgy work. For instance simple straight comparison of real estate prices or price increases are kind of meaningless without other comparative data. For instance if the forecast median house price for Memphis is 25% lower than the same forecast for MPLS, (according to the chart Memphis is $151K compared to MPLS $201k) you can’t claim that Memphis is building wealth faster than MPLS simply because their percent of increase is higher. Those rates might just be telling you that some markets were more depressed than others. In other words, this data tells us very little about the wealth of one city compared to another.

  4. Submitted by Paul Udstrand on 03/02/2014 - 01:13 pm.

    And by the way…

    These real estate projections are always dodgy. Someone is always “predicting” or “expecting” that house prices will take off in one way or another and they’ve all been wrong for the last ten years. I remember a couple years ago the business reporter here on Minnpost wrote a story based on real estate “projections” that warned everyone they better buy a house now while they can still afford it because prices were gonna soar….

  5. Submitted by Paul Udstrand on 03/03/2014 - 09:45 am.

    Bubble thinking persists part II

    Marlys: “As I mentioned, the bubble prices of 2006 are a false, overly frothy benchmark.”

    I know you say this, but yet you still write an entire article in “bubblet think!”

    I hope I’m not coming across at too cranky, I don’t mean to, I’m just genuinely surprised.

    Just to flush the property tax thing quickly, because Marlys is making a weak point (sorry), cities can’t adjust taxes based on property values alone in any event, and in practice you see that they don’t. For one thing, as long as revenue doesn’t decrease faster than expenses increase you don’t have a problem. And you can’t increase property taxes in the face of flat or meager household incomes in any event because you risk taxing people out of their homes. This was actually a concern when the bubble was building back in the 90s. People on fixed incomes who’d been in their houses for decades were starting to worry that tax hikes based on rising home values were going to put them out. This is one reason that lawmakers starting sharing expenses for city services with a combination of county and state money that wasn’t derived from property taxes alone. So you can’t assume that rising homes values are a good thing beyond modest increases.

    During the recession we saw cuts to state funding and dropping home values, and yet we still got rising property taxes. On the other hand, the county and city assessments of home value are typically 10%-20% lower than actual market value anyways.

    When you look at the big picture in context you probably don’t want housing prices in most areas to increase by more than 8%-12% right now. It could well be that if you go to cities like Memphis right now you’d find that people are complaining about the lack of affordable housing and “gentrification” and what not.

    One last thing that always mucks up these real estate comparisons is basic math. It ends up being hard to do comparisons based on percentages of value loss or gain because the math is kind of quirky. Look: if a house doubles in value during a bubble, for instance going from $100k to $200k, that’s a 100% increase. But then when the bubble bursts if the house looses ALL that gained value, it’s only a 50% decrease. That’s just math. And it gets weirder when prices start going up again. The over-all affect is to underestimate the loss and overestimate increases. This make difficult to figure out what’s actually going on with home values based on percentages like this. For instance despite their impressive price increases, Memphis homes remain way less valuable than homes in the Twin Cities. Those percentages actually exaggerate what’s happening to home values.

    Check this out: A 20% increase in a $150 Memphis house yeilds $30k. But a 10% increase in a $200k MPLS house yeilds $20k. So even thought the increase in Memphis is twice that (100%) of MPLS their only realizing a 30% gain over MPLS. You see the problem here with these kinds of comparisons. Now go out to Minnestrista a compare a 5% increase on a $2 million home to a 50% increase on a $200k home in St. Louis park. And your gonna tell me what? That SLP is wealthier than Minnestrista?

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