Research Paper on "Housing Price Dynamics Within a Metropolitan Area"

Research Paper 20 pages (7112 words) Sources: 20

[EXCERPT] . . . .

Housing Price Dynamics within a Metropolitan Area

One of the most dramatic features of the current recession is the impact that it has had on housing prices. Rather than viewing houses primarily as homes, many Americans have long considered houses to be their largest financial investments. In addition, real estate had been a fairly secure financial investment for a significant period of time. In fact, in many areas real estate was not only a secure investment, but one of the safest speculative markets, because of rapid appreciation. Between the late 1990s and the mid 2000s, real residential property prices appreciated by over 80% in the United States (Guerrieri, Hartley, & Hurt, 2009). This rapid appreciation of housing prices does not even convey the entire story about the boom housing market, because many areas had very little appreciation in housing prices, while other areas saw dramatic, even ridiculous, increases in housing prices. The ability to double or triple one's investment in a relatively short period of time transitioned real estate from a safe and stable investment to a major money-making opportunity. Real estate investment became something that the average investor could use as a means of rapid wealth accumulation.

Moreover, while other forms of investment still required substantial amounts of start up money in order to make substantial profits, real estate investing was a money-making opportunity that people could access because of loosened qualifications for mortgages. The subprime market, which was initially developed to assist first time and minority buyers, began to expand to other markets. Not only were Americans investing money in their own homes, they were also using real estate as a way of making money, and diverting capital from other investments into real estate. However, since the mid 2000s, nationwide housing prices have dropped roughly 40% (Guerrieri, Hartley, & Hurt, 2009). Therefore, when the bottom fell out of the housing market, many Americans were left in incredibly financially vulnerable positions. Their secured debts were no longer secure.

The fallout from the burst housing bubble was both immediate and chronic. The first impact was a wave of foreclosures that, to many, seemed as if they would only impact those who had foolishly borrowed money for unaffordable mortgages, under the hopes that appreciation would pay off for them. However, the reality is that the crashing housing market had an impact that went well beyond the impact on irresponsible lenders. First, foreclosures meant that banks were not getting the money that they thought they would get from each loan. This greatly contributed to the bank crisis. Federal money, which is tax money collected from Americans, was used to help bail out those banks. The actual financial cost to the average American was nominal for the bank bail outs, but the chronic impact of the bubble burst has had a larger impact on many Americans. As a general rule, foreclosed houses sell for less than owner-sold houses. The sale value of comparable homes helps determine house prices for a particular area, so even a single foreclosure in a neighborhood can have a detrimental impact on home value in that area. When housing prices begin to fall, more people may be encouraged to place their homes on the market, thus increasing both available supply and the price one can demand for the house in question.

While the housing bubble and bust impacted almost every major metropolitan area in the United States, it does not seem to have had the same impact on Houston, Texas. This paper examines housing prices in Houston and why Houston seems immune to the housing price cycles that impact the rest of the nation. The paper also acknowledges that, while Houston has escaped the extremes that the rest of the nation has faced, it has eventually felt the same sting as much of the U.S. housing market. The paper looks at why Houston, with its unique housing market and relatively strong economy, could not remain permanently immune from the housing boom and bust cycle.

Houston, Texas

Many Texans are boastful of the fact that they are from Texas and maintain that this makes them both different and better than other Americans. Whether or not that is true of individual Texans, it does seem to hold true for the housing market in Houston, Texas' largest city and the fourth largest city in the United States. Houston has had a strong housing market, even during the recession. Furthermore, while Houston has certainly felt the impact of the recession and has experienced falling house prices as a result of the economic downturn, it has managed to weather the recession in a way that other cities have not. In fact, looking at the Houston metro area as a whole, "prices held steady for Houston's overall single-family housing market in 2009. An annual study showed that 52,100 homes changed hands last years, a seven percent drop from the 56,012 sales in 2008. The median price per square foot fell to $72.58, a 0.2% change from the median of $72.71 in 2008. The median sales price increased slightly to $154,900" (Real Estate Center at Texas a&M University, 2010).

While housing prices remained relatively steady, Houston was not completely immune from the housing crisis. "The strained energy industry, a devastating hurricane and the trickle-down effects of the national economy have teamed to squeeze Houston's real estate market, which at times has seemed immune from the national downturn" (Thai, 2009). While the rest of the country was beginning to feel the squeeze of a tightening economy, Houston was experiencing job growth and was actually experiencing an increase in property values. However, when Hurricane Ike arrived, it devastated a huge part of the Gulf Coast area. Suddenly, homeowners became renters, commercial property lost its money-making potential, and home building in other areas was delayed because of a lack of supplies and the fact that rebuilding efforts were directed towards the coast. This led to an immediate decrease in home values in the Houston area. Hurricane Ike hit in September, and by January, "median sales prices dropped by more than $25,000" (Thai, 2009). While Houston may not have experienced the same level of problems as the rest of the nation, it was not actually immune to the housing bust.

However, some features of Houston's economy certainly make it seems as if it will weather the current economic crises better than many other major metropolitan areas. Some of this may be due to the fact that Houston simply did not experience the housing bubble in the same way as other cities. Because housing prices were never significantly artificially inflated, there is not a tremendous risk when the market self-corrects, which is what occurs when a bubble bursts.

Most major metropolitan areas in the United States experienced significant appreciation during the housing bubble. Not only did housing prices increase, but they increased in a way that made housing unaffordable for many people. This factor helped drive subprime lending; to have livable housing, many people almost had to choose complex mortgages schemes that left them very vulnerable to fluctuations in the housing market. However, Houston, Texas seemed almost immune from the housing appreciation mania that hit the United States in the late 1990s and early 2000s. Part of this is due to Houston's vast size. While many major metropolitan areas are growth-constricted because of nearby metropolitan areas, Houston is a fairly isolated major city. The closest metropolitan areas are Austin, San Antonio, and the Dallas-Fort Worth metroplex and the outlying neighborhoods in each of these areas are still at least 100 miles away from the center of Houston. This means that Houstonians have area to expand. Rather than engaging in fierce competition for existing housing, Houstonians can move to the suburbs. In fact, Houston might be characterized by its suburban nature more than any other area. The Houston suburbs expand north almost to Conroe, Texas, to the west out to the Richmond/Rosenberg/Katy area, and to the South to Galveston Island. The Houston metro area is literally larger than some states on the Eastern seaboard. This has meant that Houston's housing market has not followed national trends.

One of the things that placed Houston outside of the national trend was its tremendous growth in the last decade. Not only did Houston's population grow, but so did its number of job opportunities. In fact, in the early stages of the recession, many Texans believed that Texas would weather the recession with little impact, largely because of the job opportunities available in Houston. As in other boom-cycle economic trends, Houston seemed poised to be a success, because the high oil and gas prices that were crippling much of the rest of the nation's economy meant income and opportunities in Houston. "Given that Houstonians had access to the same new types of mortgages as the rest of the country and that Houston has had greater population growth than other large metros, we might expect price appreciation to be stronger in Houston than elsewhere. However, the opposite… READ MORE

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