KENNETH HARNEY: Middle America poised for real estate gains
June 4, 2006
WASHINGTON -- Could the real estate action be shifting to the heartland -- the vast swath of middle America that never really was touched by the hyperinflationary housing boom?
That's what a new statistical analysis of housing price cycles in 100 major metropolitan areas suggests could be over the horizon. Its author, Christopher L. Cagan, director of research and analytics for First American Real Estate Solutions, examined historical housing price movements and concluded that metropolitan real estate markets can be placed into three distinct categories:
- Linear markets, where booms and busts virtually never occur. Prices plod along, year in and year out, gaining modestly. Local changes in economic growth may nudge prices up or down, but the moves rarely are dramatic. Much of the middle-American heartland fits in this category. Examples include Columbus, Ohio; Indianapolis; Houston; San Antonio; Memphis, Tenn.; Atlanta; Cincinnati; Des Moines, Iowa, and Louisville, Ky.
- Cyclic markets. These are the shooting stars of housing booms. Generally they are located along the East and West coasts, where household incomes are higher and land for new construction is in short supply. They include most of California from the San Francisco Bay area south, much of Florida, metropolitan Washington, D.C., and Baltimore, New York and much of New England. When conditions are ripe -- as they have been recently -- annual housing gains in these areas can exceed 20% to 30% at the cyclical peak. Typically, however, the local booms burn themselves out by pushing prices to unaffordable levels.
Some cyclic markets experience jolting corrections that knock prices down by 15% to 25%, as occurred in southern California in the early 1990s following a multiyear boom. Other markets' corrections may be less severe; appreciation rates dwindle to the low single digits or go flat for a while, then begin the upward
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