A Tale of Three Cities: House Prices in New York, Miami and Houston

posted on June 6th, 2008 filed under: Real Estate News

The hot topic of conversation is no longer “What real estate do you own?” but “How far will prices fall?”  If history is any guide (and we like to think it is), there is quite a slog ahead.

The Landry Letter comments on real estate primarily in New York and Miami, but any historical bust is relevant, so we’ll look at Houston too.

Here’s a chart of New York metro house prices from 1976 to 2008:

Chart.OFHEO.NY

As you can see, prices rose gradually in the late 1970s and early 1980s, then boomed until the late 1980s.  In the ensuing bust, prices fell about 10% from 1988 to 1991, then went nowhere until 1996.  Eight years altogether.  That’s a long time to be underwater.

Now that prices have boomed again, what should we expect?  Considering the magnitude of the rise, homeowners should probably consider themselves lucky if prices merely fall 10% and then go sideways for another five or six years.

Here’s Houston over the same stretch of time:

Chart.OFHEO.Houston

Prices rose in the late 1970s along with the price of oil, and followed oil prices down in the early 1980s.  Because of the focused nature of the local economic woes, prices fell sharply — about 25% from 1983 to 1987 — and it was not until about 1997 that prices regained their losses.  Fourteen years underwater.  Ouch.

Prices have risen handsomely over the last ten years, but not as much as in New York and Miami, and to the extent Houston remains a hub for the domestic natural resources industry, the current boom in that sector continues to put a bid under the Houston market.

Here’s Miami:

Chart.OFHEO.Miami

The absence of volatility in the Miami market from the 1970s through the 1990s stands in stark contrast to the ensuing mania.

Don’t fall for the jive that Miami became a world-class city all of a sudden.  That’s been the city’s claim to fame for decades.  You can find posters from the 1970s declaring Miami to be the international gateway city of the future.  It’s a great place, and its future relevance is secure, but there has been no economic revolution making Miami the center of gravity for world commerce.

The only gravity that matters for Miami is the one that will pull the line on that chart back toward the long-term trend.  Prices are already falling, but to return to trend they would have to fall another 50%.  That seems so catastrophic as to be unlikely.  An alternative is for the market to stop short of catastrophic collapse and go sideways for an extended period, as New York did from 1991 to 1996.

In any event, Miami would seem to have at least another year or two of price declines ahead of it.  Prices fell in New York for three years from 1988 to 1991, and in Houston for four years from 1983 to 1987.  Prices have been falling in Miami for only a year or so.

A caveat to all these observations is that if the Federal Reserve pursues highly inflationary policies, real estate prices could stabilize and recover faster than the Houston and New York precedents would suggest.

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posted by // This entry was posted on Friday, June 6th, 2008 at 7:42 pm and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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