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The Price Paradigm

Amid all the news of plummeting national housing numbers, the premise still holds true that all real estate is local, and nothing supports that premise more than the statistics on local home price appreciation. The ka-ching from a house in Seattle rings just as dramatically as the bell tolling for a home in Detroit.

A new home sign is posted outside of a housing development still under construction, Tuesday, Oct. 25, 2005, in Issaquah, Wash., a suburb of Seattle. The Commerce Department reported Thursday, Oct. 27, 2005, that sales of new homes rebounded in September after a huge decline in August. (AP Photo/Elaine Thompson)
Elaine Thompson

Home prices and sales, while certainly susceptible to national macro-economic factors, such as mortgage rates and lending standards, rely largely on the local economy and local supply and demand. This is precisely why home prices in Seattle are up 10% from a year ago, according to the S&P/Case-Shiller Home Price Index, but down nearly 8% in Detroit. It’s the booming tech industry versus the slumping auto industry.

Hot And Cold

Home prices in Seattle have been on a tear, up for four months in a row, to a median price of $465,000 in April, according to the Northwest Multiple Listing Service. Confounding matters even more, the bulk of the homes that sold in Seattle in March went for above asking price.

“We just have a very strong market,” says Sara Hasan, financial analyst for Seattle-based McAdams Wright Ragan, a regional brokerage firm. “Two of the major employers are Microsoft and Boeing, and both are doing very well.”

Not to mention that Google has moved into the very limited real estate in the area, which makes another point: Seattle has very short land supply, further diminished by a growth management act, which restricts where and how many single family homes can be built. Limited land supply plus strong employment equals pricey homes.

The story is the same in Portland, Oregon, where a booming local economy is supporting a continued boom in the housing market. While Portland prices are a little harder to explain than Seattle’s (land is not nearly as scarce and Portland doesn’t have Boeing), names like Nike and Columbia Sportswear play a large role.

Not so in Detroit, where prices are down nearly 8% from a year ago. Much like Cleveland, which among the top 20 markets in the nation also ranks near the bottom in home appreciation, Detroit is plagued with a local jobless rate that simply isn't recovering. Prices in the Midwest overall are far lower than anywhere else in the nation, sitting at $160,400 in March, according to the National Association of Realtors, while the median home price in the West is more than double that at $330,600.

The Condo Affect

But there continue to be puzzling stories in the national mix that appear to defy employment and land supply. Take, for example, Miami. Florida is leading the housing bust, with existing single-family home sales in March down 28% statewide from a year ago.  Prices statewide are down 4%, but not so in Miami.

“There were 3,741 new condos completed last year, the majority considerably higher priced than existing inventory,” says Jack McCabe, founder of Florida-based McCabe Research and Consulting. Miami is all about condominiums. While single-family home prices in the city are flat, condo prices are up 18% over last year, despite the fact that the Miami skyline is still teeming with cranes.

Eight-thousand new units will be completed between now and the end of 2007, according to McCabe, and 12 thousand more will come on the market in 2008. That’s when prices should start to come down, but for now, condo prices on the books belie what’s going on behind closed doors in negotiations.

“We know for a fact that all these condo developers are now offering tens and tens of thousands of dollars worth of concessionary incentives, and they’re not showing up in the sales agreements,” says McCabe.

Another conundrum is all the new condos coming back on the market -- either new as in recently constructed or new as in converted from rental units during the boom. Speculators positively inhaled the Miami condo market during the boom, and many of them are now left holding an empty bag. As foreclosures rise and new inventory comes onto the market, one would think prices would drop. But consider the quality of the condo. “The majority are considerably higher priced than existing inventory,” says McCabe.

In order to lure buyers, condo converters upgraded older rental units, adding fancy amenities, appliances, fixtures and services. These are now coming back on the market, but at a higher price point, as sellers want to at least break even on investments. That’s pulling up the median price in the city, even as the sales pace begs to drag it down.

California Dreaming

Then there is the story of the housing boom that fed on itself and now has only itself to blame. Prices in San Diego, California literally doubled in the four-year stretch of the boom. A prevailing attitude that land and inventory were limited drove buyers into the market, fearful that they would miss the last boat on well-coveted property.

“It led people to believe there was a structural permanent shortage of homes, but that wasn’t really true,” says Rich Toscano, columnist for the Voice of San Diego. Because at the same time worried San Diegans were gobbling up listings, hungry homebuilders were slapping up houses as fast as they could shoot a nail gun, Lennar in particular. The real estate industry itself grew exponentially: builders, brokers, lenders, and remodelers. 

“The housing-related industry became bloated during the boom, and now we’re seeing job losses in the construction, real estate and finance industries,” says Toscano. The local economic factor pressing on home prices is, it seems, the housing industry itself.

If all real estate is local, then all local markets will move at their own pace, and that appears to be the underlying answer to the question of why certain markets are still gaining value. Atlanta, Charlotte, and Seattle were not considered boom markets over the last few years, but now their time has come. Markets that led the boom, like Washington, DC, San Diego and Boston are now bearing the brunt of the bust. It’s all local, and it’s all cyclical. The credit crunch resulting from an aggressive subprime sector certainly threw a wrench in the cycle, but prices during the boom were simply unsustainable, and investors lost sight of lessons learned during the tech boom: What goes up must come down, and what comes down, inevitably goes back up.

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