5 Bubble proof markets!
Posted online at cnnmoney.com
October 25, 2006
By: Paul Kaihla
(Business 2.0 Magazine) -- About the last place a prospective homebuyer
might want to peruse MLS listings these days is in one of the country's
most expensive markets, like San Francisco, where the median cost
of a single-family dwelling has jumped 37 percent since 2003. (It's
now more than triple the national figure.)
A couple of leading economists, however, think buyers shouldn't be intimidated,
even if prices in these markets go into a slump. San Francisco, New York, and
a small handful of other big cities may suffer dramatic swings in a downturn,
but their long-term trends "are so strongly upward that if you're willing
to buy and hold, it's a good strategy," says Todd Sinai, an associate professor
of real estate at the Wharton School and coauthor of a recently released study
called "Superstar Cities."
The same logic, Sinai says, applies in other inflated markets like Boston, Los
Angeles, and Seattle.
So what are the criteria for bubble-proof status?
Limits on the supply of new land and buildings factor heavily, but even more
important are trends in household income. According to the study, prices are
likely to keep climbing in cities where poor and middle-class households are
being nudged out by rich ones. The phenomenon skews prices higher than the national
average because more dollars are chasing fewer properties.
According to Joseph Gyourko, who coauthored the study with Sinai, living in these
areas is akin to owning a scarce luxury good. "If you think of these cities
as factories for high-income households," Gyourko says, "then the demand
for luxury goods will continue to rise as long as you're creating rich people."
Another way to put it is that the growing wage gap between rich and poor Americans
is being mirrored in real estate, and the income schism is especially exaggerated
in wealthy cities with little new construction.
On the opposite end of the spectrum are places like Las Vegas, which, despite
the huge run-up in prices in recent years, is adding more than 30,000 new homes
a year, and where the growth in wealthy households lags behind the national average.
Since the 1980s, the proportion of households in Vegas earning $110,000 or more
a year barely grew; in San Francisco, it's jumped by more than 20 percent.
The upshot? While Vegas could be looking at a price drop of as much as 13 percent,
Sinai believes the Bay Area may not have one at all.
Investors who are catching on to the research aren't waiting.
Ryan Lugbauer, whose partners own dozens of buildings in San Francisco, paid
$670,000 in September for a single-family Victorian in the Inner Mission, a Latino
neighborhood in transition. He plans to spend as much as $250,000 to turn the
house into a duplex.
"It's a great time because there are fewer bidders," Lugbauer says. "Politicians
here restrict development to a minimum, and it ends up driving up prices because
the big earners want to live here. That's never going to change." Lugbauer
thinks he could put his fixer-uppers back on the market for a combined $1.4 million
as early as next year.
Bubble-proof markets
Income trends and development restrictions have made each of these top cities
safe bets for investors.
San Francisco
Average annual home price appreciation (1949-2006)*: 4.2%
If developers were allowed to go all out with building on San Francisco's Treasure
Island, Presidio and the Marin Headlands across the Golden Gate Bridge, the price
of housing would fall close to the cost of construction. But those pristine natural
amenities are the product of one of the most anti-development political cultures
in the country - and a perennial magnet for the highest earners.
Los Angeles
Average annual home price appreciation (1949-2006)*: 3.7%
Along with San Francisco, Los Angeles was the first major metro in the United
States to become "filled up” during the 1960s and 1970s because of
geographic constraints and political restrictions on building. Three-quarters
of new construction is now in-fill development, and much of it is high end. The
gentrification is pricing out middle and lower income families, who are moving
in-land.
Seattle
Average annual home price appreciation (1949-2006)*: 3.2%
The newest graduate to join this elite class of super-expensive cities, Seattle
is the least likely to hold its place. New zoning laws approved by the city council
this year lift restrictions on building heights in the downtown core, and promise
to generate $100 million worth of affordable housing.
Boston
Average annual home price appreciation (1949-2006)*: 3.0%
Boston had the strongest wage growth of these cities through the tech bust and
jobless recovery. Over the next five years, it will have the highest per capita
income, next to San Francisco.
New York City
Average annual home price appreciation (1949-2006)*: 3.0%
The force with which middle class households here are getting replaced by wealthier
ones was reflected in the recent hysteria over the Tishman Speyer group's $5.4-billion
acquisition of 110 apartment buildings in lower Manhattan, the largest real estate
deal in recent history. The apartment blocks are home to thousands of rent-controlled
tenants who should have been priced out of the city years ago - and fear they
now will be by market rents under the new owner.
