Your City’s Housing Boom Could Go Bust


The three most important things when it comes to your home’s value are still location, location and location.

Americans worried that gains from the pandemic real-estate boom will be whittled away by the jump in interest rates can take comfort in the fact that nationwide home price declines are very rare. Depending on where you live, though, you might have reason to worry. Regional home price busts are more common occurrences than national ones and they often damage local economies. With prices up by so much in so many places, a lot of real-estate markets could be ripe for a rout.

The combination of the demand for homes set off by the pandemic and ultralow mortgage rates did wonders for home prices. Even as rates started marching higher this year, prices kept climbing. As of June, the S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, was 45% higher than in February 2020.

Economists have long said that renting and investing in the stock market is a better investment than owning a house, and in 2022 that could be especially true. WSJ’s Dion Rabouin explains. Photo illustration: Elizabeth Smelov

Even without the rise in mortgage rates, the increase in home prices would affect people’s ability to afford homes. Higher rates priced more potential buyers out. A measure from the National Association of Realtors, based on mortgage rates, median family income and the median selling price of existing homes, shows that homes were even less affordable in July than they were at the height of the housing bubble in 2006. A similarly constructed measure from the Federal Reserve Bank of Atlanta, based on CoreLogic home-price figures and additionally including tax and insurance costs in its calculation, shows affordability in July lower than in 2006. With

Freddie Mac

reporting that the average rate on a 30-year fixed mortgage hit 6.29% this week—up from July’s average of 5.54% and the highest level since October 2008—homes are even less affordable now.

Affordability strains have cast a pall on the housing market. On Wednesday, the National Association of Realtors reported that seasonally adjusted sales of existing homes fell for a seventh straight month in August, and that the unadjusted median selling price of a home was up 7.7% from a year earlier, which compared with 9.5% in July. Even so, a significant, national decline in home prices like the one that sent the Case-Shiller index down 27% from its peak in July 2006 to its trough in February 2012 might not be in the cards.

The easy financing for subprime borrowers that helped fuel that bubble wasn’t a factor in the pandemic rally, and the mortgage derivative products that helped precipitate the 2008 financial crisis are no longer prevalent. Moreover, while investment buyers have played a role in driving up prices, speculation seems to be playing less of a role than heightened demand and a low supply of homes for sale. There were just 1.3 million existing homes on the market in August, which compares with 3.8 million in August 2006.

Finally, home prices are sticky on the downside: Unless their circumstances demand it, many homeowners simply won’t sell if their ask isn’t met. Inflation can, of course, reduce the real value of a home but, according to data compiled by Yale’s

Robert Shiller

(the Nobel Prize-winning economist who with the late Karl Case constructed the Case-Shiller indexes), the only time since the Great Depression U.S. home prices (unadjusted for inflation) have fallen significantly on a national basis was during the housing bust.

But regional house-price declines have been a more regular feature of the economy. For example, home prices dropped in oil producing states, including Texas and Oklahoma, during the 1980s drilling bust. Federal Housing Finance Agency indexes show Houston area prices fell by 23% from 1982 to 1988. California home prices declined in the early 1990s, as did prices in New England after the “Massachusetts Miracle” that helped make Gov. Michael Dukakis the Democratic presidential candidate in 1988 fell flat.

Considering how far prices have risen in some places, and how unaffordable homes have become as a result, the possibility of a round of regional declines shouldn’t be discounted—especially as the Federal Reserve’s rate increases continue to weigh on the economy. The desire for more living space set off by the pandemic, low rates and, in some places, an influx of out-of-state buyers who relocated to cheaper or sunnier climes during the pandemic’s early stages sent prices spiraling higher in some cities. The CoreLogic figures used by the Atlanta Fed show that as of July, the three-month moving average of median home prices was up by 62% from February 2020 in the Austin, Texas, area, 66% in Phoenix and 67% in Tampa, Fla., for example.

People’s ability to buy homes in such areas has become severely constrained. In the Austin area, for example, where the moving average for the cost of median-priced home was $497,623 in July by the measure it employs, the Atlanta Fed estimates that monthly interest, insurance and tax payments would come to $3,385—49% of the median household’s monthly income in the area. Before the pandemic, the Atlanta Fed deemed Austin homes “affordable”; now they are less affordable than homes in the chronically expensive Boston area.

This isn’t to say that home prices in Austin—or Tampa, or Boise, Idaho, or Nashville, Tenn., or any of the many places home prices have shot higher since the pandemic started—are destined to fall significantly. But there is a risk they will, and that amounts to a risk for their economies as well. Housing booms can have spillover effects: People spend more on home goods, for example, while the demand for construction workers and other housing-related labor rises, boosting wages. In busts, those benefits unravel.

Mr. Case’s research on Boston’s boom in the 1980s helped spur Mr. Shiller’s interest in housing bubbles. When Massachusetts plunged into a deep recession—its unemployment rate went from 3.1% at the end of 1987 to 9.1% at the end of 1991—Mr. Case tied it to the Boston boom and bust, writing that it “very significantly amplified the economic fortunes and misfortunes of the Commonwealth and the region.”

All real estate is local; recessions can be, too.

Write to Justin Lahart at justin.lahart@wsj.com

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