The Facebook IPO has made a lot of my Bay Area neighbors very rich, at least on paper. And many more of my neighbors are hoping that Facebook’s IPO will set off a strong wave of housing demand that lifts local prices and finally consigns the housing bust to history. And I say to my neighbors: be careful what you wish for. Rarely are there winners without losers. Here’s what Facebook’s IPO – and the strengthening local economy – mean for the Bay Area housing market.
Over the past year, house prices have picked up and rents have been booming in the “Facebook Metropolitan Area” — the 10-mile circle around the Facebook’s Menlo Park campus, roughly from Foster City on the Peninsula down to Sunnyvale in the South Bay, plus Union City and Fremont just across the bridge in the East Bay.
Change in asking prices*
Change in asking rents*
|Facebook Metropolitan Area||
|San Francisco Bay Area (including Facebook Metro Area)||
Note: based on the Trulia Price Monitor and Trulia Rent Monitor, which adjust for the mix of homes and neighborhoods. Changes are year-over-year.
Even before today’s IPO, home prices and rents were rising in the Facebook metro area faster than in the San Francisco Bay Area overall. As Facebook’s flush owners realize their gains, there’ll be even more money chasing real estate in the Facebook metro area and in the San Francisco Bay Area generally. This new wealth should push up prices more than rents since many of Facebook’s employees will make the move to homeownership. And, Facebook aside, job growth in the Bay Area is already strong, so the Facebook IPO is adding fuel to an existing fire.
The Facebook IPO will create lots of winners in the Bay Area. These include employees and investors, of course, who can spend their new wealth on homes or whatever else they want. Other winners are people and businesses who have what Facebook millionaires want – including homeowners looking to sell, luxury car dealers, exotic-adventure-vacation tour operators, and so on. The dry cleaner and coffee shop owners in Menlo Park will be happy, too, but Facebook won’t change their lives: Facebook employees might celebrate their IPO by buying a car ten times more expensive than their current clunker (just don’t drive it to work), but they’re probably not going to go from one latte a day to ten.
But because Facebook is in the Bay Area, its IPO will create losers. Here’s why. If Facebook were in Texas or North Carolina, developers would have been building new homes in anticipation of this day. But in the Bay Area, water and the hills leave little land for development: the area in the bay under the Dumbarton Bridge would be an easy commute to Facebook if you could only build housing on the water. In addition, building regulations make development difficult on the precious flat land that exists. As a result, little new construction is underway in the Bay Area – far less than in other metros with similar job growth. Furthermore, San Francisco and San Jose were spared the worst of the housing crash and have relatively few homes in foreclosure. Without new construction or foreclosed homes coming onto the market, Bay Area housing inventory is vanishing: it’s down 40% year-over-year.
So all that new Facebook money will be competing with the rest of us for the limited supply of homes and apartments. Even if you’re that luxury car dealer watching your sales go through the roof, the kid you just sold the Lamborghini to will outbid you for that home in Woodside. Rising home prices and rents – good as they are for current homeowners and for landlords – raise the cost of living in the Bay Area. That means that businesses across the Bay Area will need to pay their employees more to keep up with rising housing costs – or decide to conduct their business elsewhere.
These are by no means new challenges for the Bay Area. Steady demand for housing, combined with tightly constrained supply, has kept real estate prices in the Bay Area – and in much of California — among the highest in the country for decades. Before this recession, when people in the Bay Area said “housing crisis” they meant a shortage of affordable housing. The recession and drop in home prices pushed concerns about affordability into the background, with foreclosures and overbuilding taking center stage. But as the Facebook IPO sends home prices higher, we’ll look back at today as the day the Bay Area stopped worrying about falling prices and remembered how expensive it is to live and do business here.0 comments
Trulia’s Spring 2012 Metro Movers report takes a deep dive into why people are searching for homes where they do.
Every three months or so, we take a close look at the home searches on Trulia: where are the searchers, and where are the homes they’re looking at? This time around we’re taking a close look at why people search where they do, and we’ve uncovered these two facts:
—- Most short-distance searches (under 100 miles away) are toward the suburbs or smaller cities.
—- Long-distance searches (more than 500 miles away) are toward more affordable markets with worse job prospects.
People want sprawl and don’t care about jobs? Of course, it’s not quite that simple – but there’s more than a grain of truth in that statement. Let’s start with the short-distance searches and move to the long-distance searches.
Staying Close, But In Need Of More Elbow Room
Over the past year (April 2011-March 2012), 44% of all the searches on Trulia were within a metro area, and 56% were to another metro area (not including searches from outside the U.S.). Of these “cross-metro” searches, roughly one-third were “short-distance” (less than 100 miles away), one-third were “middle-distance” (100 to 500 miles away), and one-third were “long-distance (more than 500 miles away). The top 10 searches were all short-distance searches, with more people looking from Los Angeles to Riverside-San Bernardino than between any other pair of metros. Of these 10, seven are from bigger to smaller metros (e.g., Dallas to Fort Worth) or from a dense urban metro to its suburbs (e.g., New York to Long Island). Here’s the list.
|Table 1: Top 10 Home Searches|
|#||Origin Metro||Destination Metro|
|1||Los Angeles, CA||Riverside-San Bernardino, CA|
|2||New York, NY-NJ||Long Island, NY|
|3||Orange County, CA||Los Angeles, CA|
|4||Dallas, TX||Fort Worth, TX|
|5||Los Angeles, CA||Orange County, CA|
|6||Detroit, MI||Warren-Troy-Farmington Hills, MI|
|7||New York, NY-NJ||Newark, NJ-PA|
|8||Newark, NJ-PA||New York, NY-NJ|
|9||Warren-Troy-Farmington Hills, MI||Detroit, MI|
|10||Washington, DC-VA-MD-WV||Bethesda-Rockville-Frederick, MD|
Note: all of these top 10 searches overall happen to be short-distance searches.
Neighboring metros share many of the same features: they tend to have the same weather, for instance. But nearby metros can differ a lot in other ways. House hunters searching within 100 miles are twice as likely to look at more suburban or smaller markets, where neighborhoods typically consist of single-family homes with yards, than at more urban or larger markets where homes are smaller and more likely to be apartments or condos (measured by density). Suburban and smaller-city markets also tend to have had bigger price drops during the housing crash and lower-cost housing now. However, these places still attract more home searches even when they are just as expensive as nearby urban markets. More than twice as many searches are from crowded Los Angeles to suburban Ventura County than in the reverse direction, even though homes are just as expensive and the housing bust was similarly severe; same with Boston and Cape Cod, and New York and Fairfield County CT.
Clearly, house hunters face a dilemma. On the one hand, people tell us they want the benefits of city living: nearby shops and restaurants, public transit and a shorter commute. But when it comes to searching for homes, they’re more likely to sacrifice these amenities in favor of more space. That’s not just because people love sprawl: many government policies, like interstate highway investments and strict regulations on urban development, encourage faster growth in lower-density areas. When people look from dense cities to sprawling suburbs, it’s partly because that’s where the homes are available at the price they can afford. In the future, people could start looking more toward big cities if baby boomers want to leave the suburbs; if rising gas prices make commuting from the suburbs too expensive; or if government policies become less biased against cities. But for now, people still have their eye on the ‘burbs.
The top middle-distance searches (table 2) include lots of rival city pairs: Dallas and Houston, Washington DC and New York, and so on. Eight out of the top 10 middle-distance searches are in the Sunbelt states – nine if you count Oklahoma. What explains these middle-distance searches? Lower density is still the main draw, as well bigger price declines.
|Table 2: Top 10 Middle-Distance Home Searches|
|#||Origin Metro||Destination Metro|
|1||Oklahoma City, OK||Tulsa, OK|
|2||Los Angeles, CA||San Diego, CA|
|3||Houston, TX||San Antonio, TX|
|4||Houston, TX||Austin, TX|
|5||Tucson, AZ||Phoenix, AZ|
|6||Los Angeles, CA||Las Vegas, NV|
|7||Phoenix, AZ||Tucson, AZ|
|8||Dallas, TX||Houston, TX|
|9||Washington, DC-VA-MD-WV||New York, NY-NJ|
|10||Los Angeles, CA||Phoenix, AZ|
Note: “middle-distance” searches are 100-to-500 miles away.
Going the Distance for Bargains and Warm Winters, But Not Jobs
Long-distance searches are where the really interesting story lies. These searches for homes 500 miles or more away account for 20% of all searches on our site. Of these long-distance searches, 54% are toward the west and 62% are toward the south, thanks in part to all those New Yorkers looking at homes in Florida (table 3). Los Angeles to New York is the only eastbound or northbound search on the list. The top long-distance searches look really different from the top short- and middle-distance searches – and it turns out that people searching for a home near where they currently live are looking for something very different than people looking to move far, far away.
|Table 3: Top 10 Long-Distance Home Searches|
|#||Origin Metro||Destination Metro|
|1||New York, NY-NJ||Los Angeles, CA|
|2||New York, NY-NJ||Miami, FL|
|3||New York, NY-NJ||West Palm Beach, FL|
|4||New York, NY-NJ||Atlanta, GA|
|5||Chicago, IL||Phoenix, AZ|
|6||New York, NY-NJ||Orlando, FL|
|7||New York, NY-NJ||Fort Lauderdale, FL|
|8||New York, NY-NJ||Tampa-Saint Petersburg, FL|
|9||Los Angeles, CA||New York, NY-NJ|
|10||New York, NY-NJ||Chicago, IL|
Note: “long-distance” searches are more than 500 miles away.
A long-distance search is very different from a short-distance search: if you’re open to moving anywhere in the US, you’ve got a huge diversity of places to choose from: sunny, snowy, mountainous, coastal, booming, affordable, old, new and so on.
Affordability matters a lot for long-distance searchers, who are 1.7 times more likely to look for homes in markets with bigger price drops in the bust, relative to where they live now, than in markets that held up better. They’re also 1.4 times more likely to look for homes in markets with a lower price-per-square-foot, relative to where they live now, than in more expensive markets. Long-distance searchers also factor in weather: people are 1.8 times more likely to look for homes in markets with warmer winters than in markets with colder winters, relative to where they live now. Density matters less for long-distance searchers – most people don’t need to move across the country just to find more space.
Here’s the surprise. You’d think that people would search where jobs are plentiful, but you’d be wrong. Most long-distance searchers look for homes in markets with higher unemployment and slower job growth than where they live now. For instance, seven times as many people in Washington DC (5.9 percent unemployment) looked for homes in Orlando (10.3 percent unemployment) than in the reverse direction. Here are other searches where twice as many people searched from the lower-unemployment market to the higher-unemployment market than in the reverse direction:
|Table 4: Searches Toward Higher-Unemployment Metros|
|#||Origin Metro (Lower Unemployment)||Destination Metro (Higher Unemployment)|
|1||Washington, DC-VA-MD-WV||Atlanta, GA|
|2||Cleveland, OH||Cape Coral-Fort Myers, FL|
|3||Seattle, WA||Detroit, MI|
|4||Oakland, CA||Las Vegas, NV|
|5||Philadelphia, PA||Los Angeles, CA|
|6||Boston, MA||Orlando, FL|
|7||Minneapolis-Saint Paul, MN-WI||Phoenix, AZ|
|8||Chicago, IL||Riverside-San Bernardino, CA|
|9||Baltimore, MD||Tampa-Saint Petersburg, FL|
|10||Long Island, NY||Tampa-Saint Petersburg, FL|
Note: listed in alphabetical order of destination metro. Each pair has at least twice as many searches toward the destination metro than in the reverse direction, and the destination metro has an unemployment rate at least two points higher than the origin metro. Unemployment rate is averaged over 2011 plus first two months of 2012.
People aren’t masochists: they’re not looking to move in order to be unemployed. Rather, they are looking primarily for affordable, warm locations, and those locations happen to have much higher unemployment rates than other markets do. The relationship between affordability–as measured by home price declines during the bust–and unemployment is especially strong: markets like Las Vegas and Bakersfield may have great bargains, but those price drops went hand-in-hand with job losses and high unemployment. This is true overall: the bigger the price drop, the higher the unemployment rate. And, as a general rule, metros with more inbound searches had bigger price drops and have higher unemployment than those with more outbound searches.
Not every search, of course, is by someone who is about to move and will need a job. Retirees, investors and people just looking for fun might not care about the unemployment rate in markets where they’re searching for homes. But the rest of us probably need a job wherever we’re moving. Few metros have bargains (big price drops) AND a low unemployment rate. Phoenix, Tucson and Fort Lauderdale almost fit the bill: they saw big price drops yet unemployment remains lower than other metros where prices plummeted.
Bottom line: if you’re making a big move and looking at markets across the country, don’t ignore the job market. Unless you’re retired, buying an investment property, or are expecting to live off your Facebook shares, remember that markets with great housing deals tend to have higher unemployment. If you still have to work for a living, you should know what the job market looks like before you plan your next move.
Editor’s note: discussion of metros with large price drops from peak revised 5/24/12.0 comments
Originally published in The Atlantic Cities on May 4, 2012.
Construction activity came to a near-halt after the housing bubble burst. The number of new residential units authorized in 2009, 2010, and 2011 was less than one-third of the level during the boom. In 2011, construction activity picked up slightly from 2009 and 2010, as the housing recovery began, with permits for new multifamily buildings leading the construction recovery. Multifamily construction has increased because rental demand rose during the recession as people chose not to – or were unable to – buy or keep their homes. Just this past year, rents rose 5.6 percent nationally according to the Trulia Rent Monitor, and that encourages builders to construct new multifamily buildings.
As always, housing is local. Construction is gearing up in some markets and remains dormant in others. These patterns are critical for understanding the future of cities, for two reasons.
First: construction activity is a bet on future growth. Developers will build only in areas where they expect housing demand in the future. Of course they can bet wrong, and that’s what happened during the housing bubble; construction in many metros far exceeded housing demand, and lots of newly built homes were (and still are) vacant. Still, construction is a clear signal of builder confidence in an area.
Second: construction shapes urban form. Housing units live a long time and are rarely destroyed, so new construction has a long-term impact on density and sprawl. The primary tool that officials have to affect density, sprawl and urban form is deciding what type of new construction, if any, to allow in different communities.
What do construction patterns say about the future of cities in America? This week the U.S. Census Bureau released data on construction permits issued by localities in 2011, including whether those permits were for single-family homes or units in multi-family buildings.
Metros with the Most Construction Permits
|Metro||Construction permits, 2011||Percent of permitted units in
multi-family buildings, 2011
|Houston, TX||31,271||27 percent|
|Dallas, TX||18,686||49 percent|
|Washington, DC||16,501||51 percent|
|New York, NY||13,973||91 percent|
|Austin, TX||10,239||39 percent|
|Los Angeles, CA||9,895||77 percent|
|Phoenix, AZ||9,081||20 percent|
|Seattle, WA||8,664||47 percent|
|Atlanta, GA||8,634||28 percent|
|San Antonio, TX||7,127||38 percent|
More permits were issued in the Houston metro area than in any other metro, by far. Four of the top ten metros were in Texas. But this list is dominated by large metro areas, and we’d expect bigger areas to have more construction activity. Looking instead at the number of permits issued per 1,000 existing housing units shows the impact of construction on metro areas relative to their size. Here are the top and bottom ten metro areas by construction activity, among the largest 100 metro areas:
Most Construction Activity
|Metro||Construction permits per 1000
housing units, 2011
|El Paso, TX||15.36|
|Little Rock, AR||10.53|
|Baton Rouge, LA||9.51|
Least Construction Activity
|Metro||Construction permits per 1000
housing units, 2011
|Long Island, NY||1.65|
|New Haven, CT||1.90|
|Ventura County, CA||2.02|
The rate of construction is highest in metros within Texas and the Carolinas and lowest in the Northeast and Midwest. The map shows the pattern across America. The rate of construction is higher across the Texas, the mid-South and Mountain states, but lower in New England, the Great Lakes, South Florida and most of coastal California.
Two factors stand out to explain which areas have the most construction. The first is long-term employment growth, which is the best guide to future housing demand. The second is smaller recent price declines: metros where prices fell less during the bust had less overbuilding and are therefore ready to absorb new housing. Among the ten metros with the highest rate of construction, all had above-average job growth over the past ten years, and none had experienced the huge home price declines that the hardest-hit areas did during the crash. Builders and developers are betting on metros with solid histories of job growth that escaped the worst of the housing crisis.
What does construction activity mean for urban form? The mix of single-family versus multi-family permits is a strong guide. Multifamily construction is higher density than single-family construction, and single-family construction is more sprawling. For the U.S. overall, one-third of the construction permits in 2011 were for multi-family units. But the multi-family share ranged widely among the largest metros, from 91 percent of permits issues in the New York metro and 86 percent in San Francisco all the way down to 2 percent in Dayton, OH, and 3 percent in Palm Bay-Melbourne-Titusville, FL. In Houston, where more permits were issued in 2011 than anywhere else, just 27 percent were for multi-family units. But not all of Texas is sprawling: in Dallas, 49 percent of permits were in multi-family units, well above the national average. In Los Angeles – which used to be the poster-child for sprawl – 77 percent of new permits were for multifamily units. Among the top permit-issuing places, Phoenix has the lowest share of multi-family permits at 20 percent, along with Houston (27 percent) and Atlanta (28 percent).
The future of sprawl, therefore, is not California. Houston, Phoenix, and Atlanta are America’s current capitals of low-density construction. Builders are betting on future growth in the South, in Texas, and in the Southwest, and they’re building single-family homes to meet that demand.
The jobs picture keeps getting better for 25-34 year-olds, and construction employment kept pace with solid overall employment growth.
The February 2012 jobs report, released this morning, was once again very strong for housing. First, the jobs picture keeps getting better for 25-34 year-olds. Second, construction employment kept pace with solid overall employment growth.
Unemployment among 25-34 year-olds
Why does this indicator matter for housing?
Between the ages of 25 and 34 is prime time when many people form households with a spouse, partner, roommate, or by themselves, then start families and buy their first home. During and after the recession, household formation dropped for this age group, and more of them than ever were living with parents or other adults rather than renting or owning their own place. These folks will wait to form their own households and consider homeownership only when their job prospects improve. A key measure for housing demand and homeownership is the unemployment rate for this group and the share of this age group that is employed.
What happened this month?
In February, the unemployment rate for 25-34 year-olds dropped to 8.7% from 9.0% in January and is at its lowest level in three years. The unemployment rate for all adults stayed steady at 8.3%. The recession hit this age group especially hard: their unemployment rate peaked at 10.6%, compared to 10.0% for all adults, but this gap is now closing. In February, 74.7% of 25-34 year-olds were employed (the rest were unemployed or not in the labor force because they’re in school, discouraged from looking or not looking for other reasons), up from 73.9% a year ago, but still way below the normal level of almost 80%.
Nationally construction is looking up -- but some places are hot while others are not.
Things keep looking up for the construction industry. New construction starts in January were 10% higher than one year ago. Confidence among builders jumped this month to the highest level in four years, even though it’s way below where it was before and during the housing boom. And construction jobs are on the rise too, growing faster than the U.S. economy overall.
But housing markets are local. In some cities you hear the sweet sounds of hammers and backhoes, but others cities are silent. Building-permit data from the last quarter of 2011 – the most recent available – show where construction is hot and where it’s not. Where it’s hot, new homes will add to the existing inventory, giving buyers more choices. Where it’s not, buyers will have to look at existing homes, and construction workers will have to hope for better news next quarter. Here are the winners and losers in new construction: