Monday, February 14, 2011

The Crash Of The Creative Class

Why does talent continue to cram into expensive cities? Ed Glaeser offers some answers in a guest blog post at Freakonomics. There seems to be a substantial dividend to packing people with college degrees into the urban core. That's why Richard Florida thinks some metros will continue to sport some of the strongest real estate markets in the country:

Generally speaking, metros that score highly on our creativity index continue to perform well. Seattle and Portland remain up as do Denver and Atlanta. Boston and Minneapolis are down a but not too much. Places like Miami and Las Vegas are literally crashing and the outlook is bleak in Rustbelt centers like Detroit which never saw much appreciation to begin with. Before anyone says anything, LA does not score highly on the overall creativity index. Washington DC is really a tale of two housing markets: prices remain relatively stable in the city but are plummeting in the suburbs. San Francisco’s declines are modest.

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix. ...

... It has been a long, painful slide. At the peak, a downturn in real estate in Seattle was nearly unthinkable. In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982.

Two local economists were quoted all but guaranteeing that Seattle was immune “if history is any indication.” A risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.

These days, the mood here is chastened when not downright fatalistic. If a recovery depends on a belief in better times, that seems a long way off.

So, Richard Florida was in good company thinking that the Seattle market was Great Recession proof. One city that did prove to be resilient is Pittsburgh, a place that isn't a hot destination for the Creative Class:

Clear Capital, a real estate research provider, says that while 35 out of the 50 largest real estate markets are expected to see home price declines in 2011, 15 of these markets are expected to rebound. Among those expected to rebound is Pittsburgh, where Clear Capital thinks home prices will rise by 0.8% in 2011.

Pittsburgh also made the list of markets that Zillow expects to thrive in 2011, since home prices already increased in 2010. Home prices in Pittsburgh rose by 1.1% from the third quarter to the fourth quarter of 2010, and rose by 1.2% when comparing December 2009 to December 2010. In addition, the foreclosure rate in Pittsburgh remained low at 0.471% in 2010.

Usual suspects such as Austin and Madison are also worth watching for value appreciation. Adding Pittsburgh to the list makes for one strange bedfellow. Dramatically outclassing the Seattle real estate market is downright shocking. Declining Seattle, Minneapolis, and Atlanta should cause us to rethink our understanding of US economic geography. Meanwhile, Pittsburgh continues to hum along and no one seems to know why.

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