Sunday, July 20, 2008

Localized Housing Bubbles: The Distribution of Inventory


My last post took a hometown look at the variation in the distribution of troubled housing. In this post, we'll zoom outward for a national view.

Based upon population data of top 100 U.S. cities, I selected three pairs of very similar-sized cities:

* Atlanta (population 519,145) and Albuquerque (population 518,271)
* Miami (population 409,719) and Omaha (population 424,482)
* Las Vegas (population 558,880) and Louisville (population 557,789)

I then went to the Realtor.com site and looked up the total number of units for sale in each city, in each of three categories:

* Single family homes
* Condominiums
* Multi-family homes

The data are charted above. Note that the total number of units for sale in Atlanta, Miami, and Las Vegas are large multiples of the number for sale in Albuquerque, Omaha, and Louisville. As we saw in the prior post, the formerly hottest real estate markets are the ones with the greatest inventories. Those, to be sure, are also the markets that have seen the largest price drops. Observe, however, that--even after these drops--they continue to sport monster inventories. It is difficult to imagine that the housing crisis is near an end in these areas.

Also note the differences of the distributions among the various units. Condominiums comprise well over half the total inventory in Miami and about a third of the inventory in Atlanta. In Albuquerque, Omaha, and Louisville, condos are a significantly smaller share of the inventory. It appears that condominium speculation is a good part of the housing bubble, but not the whole thing. Las Vegas, for instance, simply has a glut of single family homes--more than 3x the number for sale as in Louisville.

Once again, it's the lumpiness of the data--the extreme variation--that characterizes this housing crisis. It's not that the general housing market is in decline. Rather, some areas are soft and others are wildly overbuilt, to the point where it is difficult to see how they will be sold. Are more than 37,000 households likely to move into Miami--a city of a little over 400,000 people--in the foreseeable future, particularly when they'd be buying into a falling market and finding it difficult to get financing? There are many, from builders to banks, that are hoping the answer is yes. For my part, I'll cast my lot with Omaha.
.

5 comments:

Steve van Emmerik said...

Enjoy your blog! This is a very relevant one as the media tend to talk about the "housing market" as if it was some homogeneous whole when clearly even within one city/area its makes more sense to think of it as a series of loosely connected markets. I spent 5 years in the early to mid 1990's writing a thesis on about expectations formation in housing market. To simplify and generalize people generally project their own experience in their home market over the last few years into the future. This (on top of economic fundamentals like local economic growth, population changes and supply size restrictions) helps explain why some markets had huge booms and some markets didn't even though credit conditions were similar across the country.

The localization and stratification of housing markets does give some hope to building activity resuming in the foreseeable future in non boom markets that have reasonable economic conditions. I.e. contrary what most commentators seem to imply we don't have to wait for the huge inventories in California and Florida to be extinguished before building begins to increase in non-boom areas. We do however probably have to wait till people stop loosing their jobs.

On the other hand in terms of foreclosures and defaults and the flow of that into the solvency of the financial system some of these boom markets are probably still overvalued (based on historical standards, income to price, rental yield etc.) and combined with the overhang in inventory and negative local economic conditions (large negative wealth impacts, no real building industry etc) looks like lots more pain to come.

I'll look into the implications of this and blog further at http://reflexivityfinance.blogspot.com/

Cheers
Steve van Emmerik

Brett Steenbarger, Ph.D. said...

Thanks for your insights, Steve; I just linked your blog via Twitter--

Brett

Steve van Emmerik said...

Thanks Brett - Out blogs and interests seem to have a fair bit in common. Have just started mine and I'm new to this so if you've got any tips on what to do to improve it would be very interested in your opinion.

Cheers
Steve

Brett Steenbarger, Ph.D. said...

Hi Steve,

I like your posts on housing and will be linking very shortly via Twitter. Helping readers see the connection between these economic realities and what happens in trading markets is a great focus for a blog--

Brett

Steve van Emmerik said...

Thanks Brett - good point - showing relevance to people's lives the way to go. Will work on that.

Cheers
Steve