myths and realities: US real estate price variation by region, including Phoenix

“Everyone knows that real estate prices in New Orleans were devastated last decade by hurricane flooding.”

“Everyone knows that real estate always rises.” 

Actually, anyone who has looked at actual data knows that neither of these two statements are true. If you have the interest and courage to look at the simple reality, I am about to show you some actual data so you can see for yourself. As a word of caution, any myths that you may have now about real estate markets may be about to be revealed as unrealistic. Are you willing to recognize the simple truth?

As a brief reminder, I am one of the MANY people who publicly forecast (starting in 2003) the widespread decline of real estate prices. In this article, I will repeat to you WHY real estate prices have dropped and then I will repeat the basics of my 2004 hypothesis regarding the cause of the regional variation in the decline in real estate prices. As I show you the actual data, you may assess for yourself how strongly my 7 year-old hypothesis is supported by the data on regional variation of real estate prices, which became evident in the US by mid-2005.

First, let’s glance at this chart of New Orleans real estate prices for more than three decades

What do we notice there in the chart? The biggest decline in the chart above was from 1985 to 1988 (to the left of the center of the line). Further, that was not even a very big decline.

So, where was the devastating decline in real estate prices from Hurricanes Katrina and Rita and the related flooding? There simply was no devastating decline.

Obviously, the prices of many homes in New Orleans went down by close to 100%, but the actual average price of homes sold in New Orleans did not change much at all. Could that be from a [lower] proportion of inexpensive homes selling [so that lots of really expensive homes were sold to keep the average up]? Sure! Nevertheless, the decline there in the average price of a sold home has been a drop of less than 8% since the all-time high in 2006.

By the way, if it seems notable to you that the all-time high of real estate prices in New Orleans was in 2006, that may be because you know that the “devastating” hurricanes were in 2005. In other words, after the hurricanes, prices were still rising. In fact those two years had the biggest price increases in a single year within the last 3 decades:

2005      10.22%
2006      10.67%

Why? Maybe it was because a bunch of people in New Orleans suddenly needed a new place to live! Does that make sense to you?

Consider that economics is easy. When someone who understands it talks about it, it can be very easy to understand. On the other hand, if you attempt to learn to pilot an aircraft from a person who has been blind from birth, then you may find that their instructions seem rather mysterious. Again, economics is simple and easy, but the patterns identified through the field of economics can also produce either euphoria or terror- and those emotions can obscure precise recognition of the simplicity of the patterns of reality.

For perspective, in the last 5 years, the change in real estate prices in New Orleans (down 7%) is very close to the median (midway point) for the 381 biggest US metro areas. For the last 20 years as a whole, New Orleans has had one of the highest rates of appreciation of any metro are in the US: up 127% on average.

New Orleans real estate prices:

Last 5 Years                              -7%             Rank: 197 of 381 (48th Percentile)
Last 10 Years  . . . . . . . . . . . .   37%            Rank: 93 of 381 (75th Percentile)
Last 20 Years                            127%          Rank: 39 of 355 (89th Percentile)
Decline From All Time High        7.97%

In summary, how big of a factor were the hurricanes on real estate prices in New Orleans? To use scientifically imprecise terms, I would say: “not very big at all.” The hurricanes produced a brief mini-boom that added slightly to the 127% gains of the last 20 years.

Finally, did the hurricanes “devastate” prices? The clear answer is “no!” The hurricanes raised prices.

Now, rather than tell you my assertion about why real estate prices have varied by region in the US, I am going to show you some data and maybe ask some leading questions. Then, you can notice if anything new becomes obvious to you as we go.

First, in about one-fourth of the 400 biggest cities in the US, real estate prices have actually risen in the last 5 years (counting from late April 2007 to late April 2012). The next city we will glance at has done extremely well (relative to the average) in the last 5 years, with real estate prices rising 2%. However, it is far below average for the last 20 years: only up 67%.

(With price increases that small, real estate prices in about one-fourth of the biggest cities in the US have not even risen as fast as the inflation of the money supply. For the last 20 years total, real estate prices in one fourth of US cities has been a net loss after adjusting for inflation. In all of those places, savings accounts or government bonds have produced better investment gains than real estate.)

Here’s the data for Dallas:

Real Estate Appreciation, Rank & Percentiledallas real estate prices- long term chart
Last 5 Years                              2%    
Rank: 95 of 381 (75th Percentile)
Last 20 Years                            67%    
Rank: 263 of 355 (25th Percentile)
Clearly, the chart shows that Dallas had a big increase from the 1970s to the late 1980s, which was mostly just an increase due to inflation of the US Dollar. Since the 1980s, Dallas real estate prices been relatively steady, not even keeping up with inflation.
Next, let’s review a few other metro areas for contrast. I’ll show one that did even better than New Orleans for the last 20 years as well as the very biggest decline- much worse than in Dallas. Further, I will begin to put the various cities in to two groupings, contrasting the metro areas that have done the worst in the last several years, then presenting a question about what common factors are obvious for those two areas (Las Vegas and Phoenix).
Here is one of the best performing US real estate markets of the last 20 years: Denver       
charts of real estate prices in denver
Last 5 Years                              -6%
 Rank: 180 of 381 (52nd Percentile)
Last 20 Years                            147%
Rank: 16 of 355 (95th Percentile)
Decline From All Time High        5.56%

When did Denver do so much better than the rest of the US? The 1990s were big for Denver.
Real Estate Appreciation, Rank & Percentile
Last 20 Years                            116%
Rank: 60 of 355 (83rd Percentile)
Last 5 Years                              -20%
Rank: 294 of 381 (22nd Percentile)
Decline From All Time High        23.43%
Below is the chart for a city where real estate has done worse than inflation for almost every year in the last 30 years, though with a notable exception several years ago. Real estate prices there have returned to where they were in the mid-1990s, producing in a huge loss relative to inflation (and also relative to a savings account or US government bond or most any other investment, with a huge decline in “real purchasing power”). In the last 20 years, real estate has only gone up 5% (and is still falling), making this the very worst city in the US for real estate prices for the last two decades as a whole. Prices have fallen 60% there in the last 5 years, making it the second worst market in the US.
In other words, a million dollars of real estate there in 2007 would be worth about $400,000 now. Or, holding dollars as cash would have allowed one to buy about 2.5 times as much real estate there now as 5 years ago.
Real Estate Appreciation, Rank & Percentile
Last 5 Years                              -60%
Rank: 380 of 381 (Bottom .20%)
Last 20 Years                            5%
Rank: 355 of 355 (Bottom .00%)
Decline From All Time High        59.81%
 Here’s the last price chart I will show: the Phoenix area, where I live. The Phoenix price chart looks a lot like Las Vegas, though the 1990s were notably stronger in Phoenix:
chart of real estate prices in phoenix
Last Quarter                              2.67%         
Rank: 22 of 381 (94th Percentile)
Last 5 Years                              -48%
Rank: 364 of 381 (4th Percentile)
Last 20 Years                            69%
Rank: 260 of 355 (26th Percentile)
Decline From All Time High        47.78%
I also highlighted that in the last quarter (early 2012), Phoenix real estate had some of the biggest rise in price in the US. People  here might get excited about that. Then again, lots of people here were pretty excited in 2004 or 2005, and prices are down 50% since that time of popular excitement.
In 2003 and 2004, when I was first talking with people about the coming collapse in real estate prices, some people asked me “when will real estate investing be safe (or smart) again?” My answer: when most people laugh at you when you mention investing in real estate, that means that there is a lot of room for other investors to enter the market.  When more new investors are entering a market than old ones leaving, prices tend to rise.
In the short run, it does not matter really if the new investors are buying with cash or borrowing with financed mortgages. Prices will rise if more money is flowing in than is flowing out. Economics is not “rocket surgery!” Of course, if people are borrowing money to enter a market (real estate or otherwise), then the rise in price will not be nearly as stable as if they are buying with cash (100% down with no monthly installments).
Generally, the higher a portion of the cash flowing in to a market that is from borrowing, the less long-term stability there will be for prices. In contrast, when people are buying brand new homes paid for in cash, that can be the strongest type of buying in terms of long-term stability.
A surge in New Orleans  in 2005 and 2006 would be an exception, since people were mostly just  replacing destroyed homes, not adding to the total number of homes. To have long-term stability of home prices in New Orleans, there would also need to be massive engineering improvements to protect the homes from flooding, since the destroyed levies offered even less protection than before they were destroyed (none at all).
So, what is similar about Phoenix and Las Vegas that separates them from all of the others? What distinguishes those two places from other parts of the US?
One of  the most obvious things to any summertime visitor is that these places approach 120 degree temperatures every summer. They are deserts at low elevations.
However, viewed from an airplane, they are also big and spread out. They feature sprawling suburbs.
Other cities are in a desert (like Baghdad or Cairo), and other cities have sprawling suburbs (Chicago, Los Angeles), but where else do we find both together? What economic factor is most extreme in sprawling deserts?
Maybe you have noticed the price of fuel rising in recent years. If you lived in a sprawling desert metro area, maybe you have also noticed that as you moved further out in to the suburbs and got a less fuel efficient vehicle, your fuel expenses for a weekly commute have gone from $30 to $150, especially when you were running the AC all the time in the 110 degree summer heat.
Maybe you have also noticed that your summer heating bills have gone from under $200 per month to over $400 per month.
That is a glimpse of the reality of the last several years for sprawling desert metros like Phoenix and Las Vegas. In other areas, gasoline prices have certainly risen (with gas prices per gallon in the US ranging by region from under $3 per gallon to over $4 per gallon). However, most places have not had the severity of the decline in real estate that the sprawling desert metros have had.
Further, most places do not have $400 per month cooling bills in the summer. That is more than some mortgages!
Could the severity of the decline in Phoenix and Las Vegas be related to other factors not mentioned here? Of course! Again, Phoenix prices have only fallen 50% so far- not as far as Las Vegas. Clearly, there are differences between the two areas.
However, if I had to pick just one factor to explain the severity of the decline in sprawling desert metros, I would assert that it is because they are sprawling desert metros. But why recently? Why not 1995 or 1985?
I forecast in 2004 that rising fuel prices would destabilize the economies (including lending markets and real estate markets) of Europe and the US (like I assert had already happened in Japan in the 1990s). It was years later before I specified that regions like Phoenix and Las Vegas could be expected to do most poorly in any economic shift caused by rising energy prices. However, since I had been already looking for a decline in real estate prior to 2005, I was watching for it prior to 2005 and when the decline started to be obvious in the market data for August 2005 (at least in Phoenix), I promptly identified that (publicly) as the beginning of the US real estate decline.
Now, if people are not complaining of a headache at this stage, they often ask my forecasts for the future. I already made my comment about the importance of a rising number of new homes (especially bought mostly or completely with cash). Now, let’s look at some actual data:
Is there any historic increase in the demand for things like permits to build new houses in the US? No, not yet. in contrast, there are actually a huge number of existing homes with delinquent mortgages or even already lining up for foreclosure auctions (as I was referencing by 2004 to be nearly inevitable in the near future- as in now).
We could also look at data for mortgage applications or for the “traffic of prospective buyers” (as measured by the National Association of Home Builders). However, what is notable to me is that most people considering the purchase of a home do not look at that data and may not even be aware of it. The near absence of an interest in actual data is to me a “de facto” admission that there is no new surge of sanity or diligence among buyers. They are buying based on the exact same rationalizations that were grossly wrong in 2006 (and still may be).
Relative to overall price fluctuation in the US, average real estate prices continues to decline:
Average U.S. Real Estate Price (Logarithmic Graph) divided by CPI (Consumer Price Index)
What do I recommend next for investors? I recommend slowing down enough to focus on the possible value of forecasting. You may recognize the possible value in finding a competent forecaster and hiring them as an adviser (and then actually doing as they recommend!).
While  there are an enormous number of forecasts being promoted and publicized, some are more valuable than others. What are obvious factors to use in evaluating a forecaster or forecasting method?
Does it correspond to the actual data? Is there an established record of extraordinary value and accuracy? Is the logic clear and simple?
As I have consistently said since 2004, I assert that energy prices are extremely important to economic activity. Energy prices (adjusting for inflation) had been declining in to 1999, then reversed in to what I asserted in 2004 could be a very long-term increase. By 2008,  energy prices reached high enough to destabilize the prior trends in economics and finance. Falling demand brought down energy prices sharply since then, but have recently approached the highs of 2008, with gasoline prices again exceeding $10 per gallon in parts of Europe.
On that note, if you think that $4 gallons of gasoline have effected the economies of sprawling desert metros like Phoenix or Las Vegas, have you considered what would happen at $8 or $12 per gallon? Since 2004, I have been thinking ahead of such issues and the implications are easy enough to identify.
In this article, I recognize that I have not referenced WHY energy prices began a long-term increase in 1999. Because I extensively addressed that in my 2004 publications predicting an emerging dramatic reversal in many economic trends, I will simply provide a few links here:
2004 – The Real US Deficit: OIL!   (The host changed the original link, so contact me if you want to see that content.)
2005- Navigating the New Economy, Lesson 1: “Worth its Weight in… OIL

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