Housing Exodus to Far-Flung Areas to Continue
Home owners in the years ahead are far more likely to find themselves stuck in traffic on their long drives to and from work than mired in moribund housing markets where a price bubble has popped, according to the 2005 State of the Nation’s Housing Report released today by the Joint Center for Housing Studies of Harvard University.
Housing demand is “on track” to support the production of 19-20 million homes over the next 10 years, the report says, and “the vast majority of these homes will be built in lower-density areas at the metropolitan fringe where cheaper land is in more ample supply.”
Tracking a trend that is as least a century old, Harvard researchers found a tripling in the number of the largest metro areas where more than half of households live 10 miles or more away from the central business district and three times the number of metros with more than a fifth of their households living 20 or more miles away from the urban center.
One-third of the households in Boston and Riverside, Calif. and nearly one-quarter of San Francisco’s households live 30 miles or more outside the center, the report says. About one in five of Boston’s and Riverside’s households live 40 miles or more out, as do about one in 10 households in New York; San Francisco; Portland, Ore.; Washington, D.C. and Las Vegas.
“The strong outward development push, coupled with Americans’ strong preference for driving to work alone, has resulted in much longer commute times,” the report says. “Between 1990 and 2000, the number of workers in the 49 largest metros commuting an hour or more increased by an astounding 2 million.” For the rest of the country, the number of workers commuting for that amount of time grew by 1.1 million.
And as the congestion grows on the nation’s highways, the share of commuters who are carpooling or relying on public transportation has been declining significantly, according to Harvard’s findings.
New Life for Cities and Inner Suburbs?
With jobs still concentrated in central business districts, “this trend could help to bring new life to cities and the inner suburbs even as development at the edges of metro regions remains intense,” the report says. This will also exert more upward pressure on land costs and increase the premium that workers have to pay to be able to live closer to employment centers.
Although the pace of infill development slowed in the 1990s when only 10 of the 93 largest metro areas saw an increase in the number of homes built within five miles of the central business district, 750,000 new units were built in the inner ring of those cities during that period, “much greater than one might think,” Harvard’s housing analysts report.
However, a significant amount of this infill development represents the replacement of older units rather than net additions to the housing stock.
Fanning Bubble Fears
On the rapid run-up in housing prices that has been fanning fears of house price bubbles, the Harvard housing analysts said that, “For now, house prices are likely to keep going up, with job and income growth offsetting any drag from the recent uptick in short-term interest rates and possible near-term increases in long-term rates.”
However, the researchers did sound a warning that a sharp rise in mortgage interest rates “could create a headwind strong enough to bring house price appreciation rates back to more sustainable levels.”
Not adjusted for inflation, house prices climbed 10.2% last year, the largest annual surge since 1979.
Noting that housing price appreciation over the last five years, when it has been strongest, has created a mismatch between house prices and income growth that “is alarmingly large and widespread,” taking a longer 10-year perspective, house price inflation has matched or lagged behind income growth in 125 of 153 metro sample areas, the study found.
The places at risk of a correction if price appreciation does not slow soon are four metros where house prices have increased at least twice as fast as incomes and 24 where they have outgunned incomes by 30%-99%.
“Whether the overheated markets are headed for a sharp correction is another question,” the report says. “The current economic recovery may give housing prices in these locations the room to cool down rather than crash. And some of the price gains may in fact be permanent. In many metros where prices have risen the fastest, natural or regulatory-driven supply constraints may make the higher prices stick.”
Natural or regulatory constraints on residential development are the most likely factors that have been driving up land and construction costs, the report says. “Indeed, inventories of homes for sale are very lean in areas experiencing the most outsized gains in prices. As a result, buyers are bidding up prices as they compete for the limited number of homes available.”
Housing sales would have to tumble by a third for at least a year to create anything resembling a buyer’s market, the report says. But researchers at Harvard are concerned over the rising share of homes that are being purchased by investors.
The current housing expansion has lasted for an unprecedented 13 years. “By comparison, the next-longest endurance record for starts not falling by at least 10% since 1975 is just five years,” the report says. “This is also the first housing cycle in postwar history where the sector did not lead the economy into recession.”