Though it’s not the double-digit bacchanalia of the ’80s, finally, it may be time for home owners and sellers to break out the champagne. Prices in many major markets are bubbling upward.
Detroit’s prices continue to set the pace. Chicago also is seeing healthy rises. Phoenix may be slowing after two heady years. On the coasts, Miami, New York and San Francisco are faring well, but long-troubled Los Angeles remains in a slump.
So says the latest installment of the Home Price Forecast, prepared for the Wall Street Journal by Case Shiller Weiss Inc., a Cambridge, Mass., research firm. The forecast reflects actual price changes from August 1995 to August 1996 and projects to January 1998.
Although rising home prices generally are viewed as an indicator of financial well being, they are inclined to chase the economy, not lead it. In areas of rising employment and wages, housing prices tend to follow. The engine powering Detroit’s increases, for instance, is the revved-up auto industry. Los Angeles, on the other hand, remains mired in low job growth.
Not that Los Angeles is becoming a bargain. Its projected median home price of $157,200 is still relatively high, especially when compared with Detroit, where the median price is expected to reach just $126,700 a year from now.
Overall, the forecasters predict that stable mortgage rates, strong immigration and a good balance of supply and demand should keep housing prices rising throughout the country this year at about 3.5 percent, or about a point above the rate of inflation.
As for last year, the forecasters were far too cautious. They anticipated a tight labor market and strong job growth would cause interest rates to spike. But that didn’t happen, and in eight out of 10 cities, the firm’s predictions fell below actual price increases.
Detroit was most off the mark, with a percentage increase of 9.7 percent, nearly twice the 4.9 percent the economists predicted.
In four cities, however, the prognostications were within a percentage point of the actual prices.
Here’s what the firm predicts for the coming year, in an alphabetical listing:
BOSTON +3.0 percent
January 1998 Projected Median Price: $158,200
Forecast: Prices should rise 3 percent, slightly out pacing the rate of inflation. Richer suburbs should fare the best.
Background: Boston is dusting itself off after a severe recession, but hasn’t fully recovered yet. Employment growth is slow but steady at 1 percent, and unemployment is less than 5 percent. Small high-tech firms, the mutual fund industry (Fidelity Investments plans to add 1,000 jobs), and heavy construction (a new convention center and tunnel are going up) are reviving the economy. Office vacancies are 7.3 percent, down from 9 percent a year ago, and substantially lower than 19.9 percent in 1993. Still, the population continues to grow slowly, losing migrants to the Sun Belt.
Those who toughed it out, however, particularly in the affluent western suburbs, are finally cashing in. There, move-up buyers have pushed prices higher as much as 30 percent over the past three years.
Scorecard: Last year, Case Shiller Weiss predicted a 1.2 percent price increase in Boston between August 1995 and August 1996. But the actual increase of 4 percent was far more robust than anticipated.
CHICAGO +4.2 percent
January 1998 Projected Median Price: $152,400
Forecast: There’s still a breeze in the Windy City’s sails. Prices should rise 4.2 percent, well above the rate of inflation.
Background: As in most Midwestern cities, home prices in Chicago have increased incrementally for more than a decade, without the big peaks and valleys caused by overbuilding. And the current median home price of $146,300 still is less expensive than similar homes in coastal cities. Close-in, affluent suburbs are seeing the best price increases, with some builders in Glencoe, Northfield and Winnetka tearing down old houses to make way for more expensive new ones.
More than 65,000 jobs were added to the labor market over the past year, and the manufacturing sector is gaining ground. Employment growth is 1.5 percent. Office vacancies fell to 14.1 percent in 1996 from 17.1 percent in 1994.
Scorecard: For the year ending in August, the firm predicted a 1.1 percent increase. But Chicago’s prices were healthier, gaining 3.4 percent.
DETROIT +6.0 percent
January 1998 Projected Median Price: $127,600
Forecast: The pedal has hit the metal in Detroit, with prices zooming 6 percent.
Background: Detroit’s hot, auto-fueled economy added 90,000 jobs, an increase of 3.7 percent, for the year ending in September. General Motors Corp. announced last year that it was moving its world headquarters to Detroit’s Renaissance Center, pulling in workers from all over Michigan. Ford Motor Co. is sending 2,500 jobs to the suburbs, but keeping them within the metro area.
Although the downtown area remains troubled, with an office vacancy rate topping 20 percent, suburban office vacancies have dropped to 10.1 percent from 17.2 percent two years ago.
Most of the upward price pressure comes in the suburbs, especially in Royal Oak, Dearborn, Clawson and Sterling Heights. The current median price of $120,300 is one of the lowest of any major metro area. Single-family permits were up 17 percent at midyear.
Scorecard: The biggest surprise of all, Detroit’s prices rose 9.7 percent for the year ending in August. Case Shiller Weiss projected a 4.9 percent increase.
LOS ANGELES -0.1 percent
January 1998 Projected Median Price: $157,200
Forecast: Home prices will remain flat until the economy shows more signs of life.
Background: While the rest of California slowly recovers from the recession, Los Angeles lags behind. Office vacancies are stuck at 21 percent downtown and 19 percent in the suburbs. Employment growth, though rising a bit in the third quarter of 1996, has been less than 1 percent a year. Prices have dropped more than 30 percent since 1990 in the top third of the market.
But there are some glimmers of hope. High immigration has boosted the low end of the market. Moderate-income households show signs of pent-up demand. And more jobs are likely to materialize this year in the aerospace, tourism, entertainment and construction industries.
Scorecard: Last year, the firm projected no change in Los Angeles home prices. The region did slightly worse, with prices dipping 0.7 percent.
MIAMI +3.3 percent
January 1998 Projected Median Price: $124,200
Forecast: Skies were mostly sunny last year, and the outlook for this year is even better: a 3.3 percent price rise.
Background: The bull market on Wall Street has put extra dollars in the pockets of Miami’s burgeoning numbers of retirees and vacation-home buyers. And a sharp drop in residential permits (down 50 percent in 1996 compared with a year earlier) has kept inventories stable, propping up home prices.
Job growth is a healthy 3 percent, and household growth, after dipping three years ago, has rebounded. A major port for Latin America, Miami has benefited from a weak dollar and increased foreign trade.
But Miami’s financial troubles, high crime rates and heavy immigration have hurt the central city. Growth is strongest in the Broward County suburbs, especially west of Int. 95.
Scorecard: Case Shiller Weiss anticipated a 0.7 percent price increase for the year ended in August; but Miami’s prices actually rose 2.9 percent.
NEW YORK +3.2 percent
January 1998 Projected Median Price: $181,300
Forecast: The Big Apple will shine, with home prices increasing 3.2 percent, well ahead of inflation.
Background: The region’s 1.4 percent job growth rate is below the national average, but it is the fastest pace New York has seen in more than a decade. That is despite the fact that two of the biggest private-sector employers, Chase Manhattan Bank and Nynex Corp., are reducing their payrolls, and the public sector as a whole has cut 12,000 jobs.
Wall Street is taking up the slack, with high salaries and bonuses pushing up incomes and home buying power. (Caveat: If the bull market ends, expect the home trade-up surge to dry up abruptly.) Tourism also is strong, and hotels are operating at near-full capacity.
At the high end, what little is available is very expensive. In Manhattan skyrocketing rents are forcing many people to consider buying apartments rather than renting them. Condominium prices are reflected in the forecast, but co-ops are not.
Scorecard: New York pulled slightly ahead of the previous forecast of a 1.6 percent rise for the year ending in August. Prices rose 2.4 percent.
PHILADELPHIA +2.9 percent
January 1998 Projected Median Price: $128,500
Forecast: House prices should keep a bit ahead of inflation, rising 2.9 percent.
Background: In the two most recent quarters, 106,000 new jobs were created in Philadelphia, giving its flagging economy a needed shot in the arm. More than half of the area’s manufacturers reported stepping up orders during the last half of the year.
Lockheed Martin Corp. said it would add a new Center for Communication and Power in Newton in Bucks County, adding 1,300 workers. And some new businesses, particularly pharmaceutical and biotechnology firms, are doing well.
Home prices continue to stagnate in the inner city, but are rising in the outlying bedroom communities. A number of new million-dollar homes are being built along the Main Line, mostly in Radnor, St. Davids and Villanova. Office vacancies are at 16.5 percent downtown, but only 10.7 percent in the suburbs.
A rise in tourism, thanks to the Cezanne exhibition and strong bookings for sporting events and the convention center, have filled hotels to 80 percent of capacity and boosted the local economy.
Scorecard: The researchers expected a decline of 0.5 percent, but it never materialized. Rather, prices edged up 1.5 percent for the year.
PHOENIX +4.3 percent
January 1998 Projected Median Price: $122,300
Forecast: This red-hot market is cooling slightly. Home prices should rise 4.3 percent.
Background: Phoenix has much to crow about: Its 3 percent annual household growth rate is the highest in the nation, and in the past two years, office vacancies have dropped to 13.5 percent from 19 percent downtown, and to 9.6 percent from 15.7 percent in the suburbs.
But the employment boom is slowing dramatically. From September 1995 through September 1996, the region saw just 17,600 new jobs created, a 1 percent growth rate, down from 12 percent growth in 1994.
In the third quarter of 1996, the area actually lost 3,300 jobs. One reason is downsizing in the area’s semiconductor industry. Another is the fact that the construction industry itself represents more than 11 percent of the employment base in Phoenix, and is highly sensitive to changing demand.
The huge flow of refugees from California has been staunched as that state’s economy has revived. But permits are at a record level, with 25,421 issued in October, up 5.9 percent from last year. So the possibility exists that the area will become overbuilt, weakening home prices.
Scorecard: The forecast here was nearly on target. For the year ending in August, a 5.7 percent rise was expected. Prices actually rose 5.5 percent.
SAN FRANCISCO +3.3 percent
January 1998 Projected Median Price: $244,300
Forecast: Despite home prices that already are among the highest in the country, San Francisco’s homes should appreciate 3.3 percent.
Background: The City by the Bay has made a remarkable recovery, and is leading the state out of its deep recession. It is helped by the spillover of a Silicon Valley housing and employment boom to the south; indeed, software development is one of the area’s strongest growth sectors, along with manufacturing and communications.
Most of the job growth is in white-collar professions, and the best appreciation is in the toniest suburbs north and east of the city. Though household formations are rising, single-family permits fell 11 percent from midyear 1995 to 1996. Tight supply should elevate prices.
Scorecard: San Francisco did better than the forecasters predicted. They projected 0.6 percent appreciation; the actual increase was 2.2 percent.
WASHINGTON, D.C. +1.1 percent
January 1998 Projected Median Price: $166,200
Forecast: Home prices will rise only 1.1 percent, less than the rate of inflation.
Background: The district has been suffering economically, and the infrastructure is a mess. Residents continue to flee to the suburbs to escape the high inner-city crime rate and poor schools. Office vacancies rose to 11 percent in 1996 from 8.3 percent in 1994. And the federal government, which accounts for about 25 percent of all employment, lost 14,000 jobs during the year ending in June.
But in the suburbs, particularly in northern Virginia, the story is much brighter. New-home sales are especially strong in Loudoun and Prince William counties. A number of high-tech firms, such as America Online Inc., MCI Communications Corp. and UUNET Technologies Inc., have a big presence there. International Business Machines Corp. and Toshiba Corp. broke ground on a $1.6 billion semiconductor plant. The biggest problem the suburbs face is attracting skilled high-tech workers.
Scorecard: Case Shiller Weiss was pessimistic last year, predicting a price drop of 0.1 percent. Prices actually increased, but by only a hair–0.3 percent.
