Rent or Buy: San Jose or Columbus?

David Leonhardt has an article in The New York Times (hat tip Wehr in the World) about his decision to switch from renting to buying a house. There is an accompanying graphic showing the ratio between the purchase price of a house and the annual rent for an equivalent house by city. I’ve highlighted the ten markets with the highest ratio in green, and the ten markets with the lowest ratio in red:

(Click on image for a larger version in a new window)

To me the most interesting thing about this information is the premium people are still willing to pay to own a house in bubble markets. The ten markets with the highest ratios are all California coastal cities, south Florida, and New York and Boston. The cities with the ten lowest ratios are all Midwest cities, plus Pittsburgh, Dallas, and New Orleans.

The city with the highest ratio is San Jose (30.7); the lowest ratio is Columbus, Ohio (11.4). Keep in mind we are not comparing house prices and rents between the two cities, we’re comparing the ratio between house prices and rents within the city. People value ownership in San Jose much more than in Columbus.

There is a long term trend away from the Midwest and to the coasts. The reasons are complex, but boil down to changes in the employment base and geographic attributes of the areas like weather and topography. For more on the employment base issues, a good starting point is Richard Longworth’s Caught in the Middle: America’s Heartland in an Age of Globalization. For more on the role of geographic attributes, see the research of David McGranahan, an economist with the United States Department of Agriculture (summarized in this post).

Everyone Picks on Detroit

As usual, Detroit once again has suffered the largest population decline and net outmigration of major metropolitan areas on both an absolute and percentage basis (Census data released March 19 here). Mark Perry’s Carpe Diem post, “Supply and Demand in Action,” displays the image below:

 

But the larger story is the continuing depopulation of rural counties in states like Arkansas, New Mexico, and Oklahoma. Here’s the list of counties with the greatest percentage net outmigration in 2008:

Interesting that no Michigan counties made the top 20. I’ve previously posted on the “natural amenity” explanation for why places like this are depopulating.

Where Do Americans Want to Live?

The top five metro areas are Denver, San Diego, Seattle, Orlando, and Tampa, according to Pew research reported in this New York Times opinion piece.

The author, David Brooks, gives a number of reasons why, but this one caught my eye:

These are places (except for Orlando) where spectacular natural scenery is visible from medium-density residential neighborhoods…

One of my favorite themes is the link between natural amenities and market growth. Weather, water, and topographic diversity correlate highly with long term growth trends, and all these cities have very high natural amenity scores.

Pittsburgh versus Phoenix, Football and Growth

Although Pittsburgh had the better football team (at least this year), Edward Glaeser picks Phoenix as the long term growth winner:

The Super Bowl was a reversal of fortune because Phoenix is one of the country’s biggest boom cities and Pittsburgh continues to lose population. Since the last census, Phoenix’s population has grown by 927,551, more than any metropolitan area except Atlanta and Dallas. Over that time, the Pittsburgh area has lost more than 75,000 people, more than any city other than Katrina-beset New Orleans.

Why?

The great boom areas of the 21st century — Atlanta, Dallas, Houston and Phoenix — are expanding because of a combination of warmth and willingness to build. While geography made Pittsburgh’s rise inevitable, Phoenix has few innate natural advantages, other than sunshine. Instead, it has mile after mile of desert, which it is covering with thousands of attractive, affordable homes.

Warm temperatures don’t count for everything, for example, Denver and Boise, for example, both have strong long term growth trends and are not particularly warm places. When you account for a few other natural amenities like mountains and water you get a better picture of which areas grow and which don’t. David McGranahan of the U.S. Department of Agriculture has studied the effect of natural amenities on growth for many years. I’ve previously posted on his work here.

Are Natural Amenities a Safety Net Against Value Loss?

There's an interesting post on Lansner on Real Estate today reporting Orange County's beach communities are suffering least from the current housing slump.

In an earlier post I discussed research which indicates markets with natural amenities (good weather, water, mountains) have better long term growth records than markets which lack these amenities (too hot/cold/humid, dry, flat). Orange County's beach communities are at the top of the scale when it comes to weather and water, and maybe the data referred to in Lansner's post indicate amenities mitigate against value loss in a down market. A broader study would have to adjust for the fact that many high amenity communities have more second homes and rental vacation properties, which probably have their own dynamic.

Home Values, Markets, and Natural Amenities

Most news coverage focuses on national housing trends, largely because there's more data available. However, there are huge differences in how home values have performed between markets, and one of the performance drivers is natural amenities.

The natural amenity concept was developed by David McGranahan, an economist with the United States Department of Agriculture. McGranahan was investigating why some rural counties grew while others lost population. His idea is very basic; people move to places that are pleasant. McGranahan developed an index which scored places based on weather (How cold in the winter? How hot and humid in the summer?), topography (hills and mountains are more interesting than flatlands), and water surface (coasts, lakes, ponds and rivers are more interesting than drylands). When he mapped the index and population change, this is what he got:

Better images (and the whole study) are available here. There seems to be a correlation between a market's natural amenities and population growth.

What's this mean for home and apartment values? Nothing good happens to values in markets losing population and jobs (a topic for a separate post, but Ben Wattenburg's book Fewer does an excellent job describing the negative economic consequences of depopulation). Here is a comparison of the OFHEO Housing Price Index between Flagstaff, Arizona (solidly in the dark green of both amenities and growth) and Muncie, Indiana (in the red on both):