Almost a decade after the residential real estate crash, the housing market is being reshaped. Average home prices stand more than 10 percent above their 2007 peak values, but the market’s rise has been uneven. While nationwide price trends have risen comparably to household income, real estate prices have skyrocketed in large coastal metros like San Francisco and Seattle. Largely driven by these cities’ booming tech sectors, home prices in these areas have climbed approximately 56 percent above their pre-recession peak.
In the nation’s hottest housing markets, renters and first-time buyers are feeling pinched. Most of these cities’ residents don’t work for superstar tech firms; for many, the escalating cost of living outweighs the opportunities presented by the dynamic metro economy. As homeownership slips further out of reach for many residents in big cities on either coast, growth has shifted inland. Job creation is now strongest in cities like Austin and Denver, where diversified labor markets and low housing costs are attracting a new cohort of transplants.
For the country as a whole, rising home prices aren’t a drag on the economy. Unlike last decade’s housing bubble, home prices in most markets are climbing in alignment with rising incomes. Even nationwide rents, which have risen 40 percent since the peak of the last business cycle, have been outpaced by household income, which grew by 50 percent. The current climb in housing prices appears based on solid fundamentals, driven by the accelerating pace of new household creation.
For the roughly two-thirds of Americans who are homeowners, rising real estate values are generating new wealth. Revenues from rental properties account for almost 5 percent of personal income; for landlords, climbing rents are an economic benefit, not a drag. Stronger household balance sheets for homeowners could create a surge in consumer spending, which will support further economic growth.
Since the overall trends in national housing prices are benign, there’s little room for federal policy to address regional imbalances. Instead, stressed communities will need to adopt zoning and development solutions that increase the housing supply. In the meantime, the market is moving toward a new equilibrium as growth spreads to noncoastal regions of the country.
In some of the nation’s most expensive cities, rising rents have become associated with a slowdown in job creation. In the early years of the recovery, areas like New York City, Los Angeles and San Francisco led the nation in job growth. These coastal metros had booming technology and media industries that created new job opportunities at a faster rate than the national average.
Over the past two years, however, the pace of job creation in these cities has tapered. Today, it’s inland metro areas that are adding workers more quickly than the national average. Cities in the West—such as Provo, Reno, Denver and Lake Tahoe—are likely benefiting from proximity to Silicon Valley coupled with lower housing costs.
Individual workers and families deciding whether to relocate must weigh their options. Moving to an expensive market could mean living in a cramped apartment or enduring a lengthy commute. For many, a smaller inland metro can offer a better quality of life. And businesses planning to expand are likely attracted to these cities for their ease of bringing in new workers.
A similar dynamic is playing out within interior states. In Tennessee, for example, Nashville’s job growth outpaced the national average for much of the past decade, but higher rents have recently pushed the city’s expansion back into alignment with national trends. Meanwhile, the smaller city of Chattanooga has seen its growth rate accelerate. Workers and businesses choosing between the two cities are likely being drawn by the lower cost of living in the state’s southeastern corner.
The rebalancing of growth is a consequence of supply and demand—there’s only so much real estate in Manhattan or San Francisco. As housing supply constraints begin to limit potential workforce growth in coastal markets, economic momentum will naturally shift toward regions that are able to accommodate new workers.
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