Housing: Part 261 - comparing three markets

This graph compares median home prices in Phoenix, LA, and New York City to the median US home price.  Briefly reviewing these three prices can give us a quick summary of what happened during the housing bubble and what might not have happened, in spite of our initial conclusions.

Let's start with New York City.  In 1997, New York City was already pretty expensive, but it got even more expensive in the years that followed.  Eventually New York homes rose to more than twice the price of homes elsewhere.  Surely part of the bubble, it would seem.  But, strangely, even with the extremely tight lending markets of the decade since, New York homes have remained more than twice as expensive as homes elsewhere.

LA looks much like New York City before 2004, but prices there jumped as the privately securitized motgage market exploded.  Then prices came back toward New York prices when that market collapsed.  This suggests that collapse was disruptive.  So was the private mortgage market part of a housing bubble?  Seems clear. Except that, again, during tight lending markets LA home prices have not only remained twice as expensive as homes in other places, but they have moved back up to triple the typical home price.  This suggests that those prices don't require loose lending.

Phoenix prices jumped by nearly 50%, relative to the US and then quickly retreated. After briefly falling below the US median, the Phoenix median price has recovered back to about the US norm.  That looks like a bubble.  Up to about 10% of the US had housing markets that looked like this. All of those places have one thing in common.  At the time they were taking in thousands of migrants from cities like New York and LA looking for homes.  Those migrant flows usually amounted to 1% or more of local populations per year until they dried up in 2006.

Cities like Phoenix aren't even close to their capacity for building homes today. That is one necessary ingredient for a bubble - short term supply inelasticity.  What would happen today if lending was more generous? It would be interesting to find out.