Philly Should Worry About a Housing Shortage, Not a Bubble

Philadelphia has been experiencing a spate of sustained growth in home prices in the post-recession period, leaving some observers to wonder where the ceiling is. The latest entry in this genre is a blog post from Jonathan Tannen at Econsult, which poses the question of whether our recent housing market trends are sustainable, or whether we're watching a bubble developing. 

The latest entry in this genre is a blog post from Jonathan Tannen at Econsult, posing the question of whether our recent housing market trends are sustainable, or whether we're watching a bubble developing. 

Tannen writes:


An average Philadelphia house sold for $112K in April (these numbers are seasonally-adjusted, smoothed over time, and adjusted for housing traits), compared to $92K in April 2016. This means that prices are up 6.1% over the last quarter anda whopping 22.2% over the last year. This increase mostly represents skyrocketing demand, though it also includes changes in housing quality, as houses are being built new or rehabbed.

This continues the dramatic boom in prices since November 2015. In the 17 months since, prices are up 44% (after years of modest growth, if any).

Growth rates of 22% aren't likely to continue indefinitely, but the big question is: if the market course-corrects, what's our growth rate going to average out to? Just because we've enjoyed a period of higher-than-average growth, it doesn't necessarily follow that we're headed for an equally large crash--it could just mean we'll see a few slow quarters.

Tannen offers the unsustainable case, which goes like this: Philly prices are at an all-time high, and people are over-leveraging themselves to buy homes at the end of the cycle, in an overheated market. Debt levels are way up to 2008 levels, and the prices people are paying can't be justified by the city's underlying growth prospects.

That last part is key. The Great Recession is still fresh in people's minds, so there's a tendency to assume the worst--that the rate of price growth isn't just a little high, but way off the mark, and prices will soon come crashing down.

This perspective is a little ahistorical. Philly didn't really have a major price speculation boom in the lead-up to the 2008 crash the way some places did, and our housing market crash was milder than most. But because the Great Recession was national in scope, we were subject to the same trends of high joblessness and tight lending markets, and thus experienced a few years where we didn't build very much housing. The population kept growing during that low-building period, however, so when the economy started to recover, we experienced several years of V-shaped catch-up growth in housing construction to serve all the pent-up demand. 

Tannen's other explanation--that Philly is actually being revalued both regionally and nationally--is more persuasive and worth quoting at length (my bold.)

But what is the argument that maybe this is the beginning of long, sustained growth? The core is that this boom in prices represents the continued trend of Americans revaluing urban lifestyles. Philadelphia is actually relatively late to the game, as prices have already boomed similarly in New York, Boston, and San Francisco, however, with its walkable streets and distinct neighborhoods, Philadelphia is perfectly suited to attracting new urbanists.

Meanwhile, job growth in the Greater Philadelphia Region, which has long lagged other large cities, has finally outpaced the country and a majority of other large U.S. cities.

As preferences shift, the pool of people who moved to the suburbs in past generations will start bidding for houses and apartments in the city, adding to the competition among buyers and renters, and driving up values. Even relatively small shifts in preferences can lead to system-wide changes when multiplied by the entire population of our metropolitan region. These new in-movers are probably going to move just to the edge of already-gentrified neighborhoods, causing the gentrified regions in Kensington, West Philly, and South Philly to spread.

Predictions are hard, especially about the future, but there are some compelling reasons to believe the post-recession housing price growth is rooted in some fundamental conditions in the local economy: a combination of strengthening job growth, softening housing production, and a stagnant suburban housing market that suggests a small shift in preferences toward housing in the urban core.

Philly housing prices are comparatively low

Any conversation about housing price growth rates first needs to be grounded in where housing prices are, or have been in the recent past. Tannen writes that Philly's median home price rose from $92,000 to $112,000 in a year, which is a big jump, but the underlying price is still objectively pretty cheap for a house in a big East Coast city.

How do we benchmark that? Lucky for us, Steve Ballmer's excellent new Data USA site came out last week, with a trove of statistical information on US cities, and one of the most fascinating charts is a breakdown of city housing supply along a spectrum of price points. The tool lets you compare various cities' range of home prices to the national average, or to other cities.

The entry for Philadelphia is interesting because it shows that, in 2015 (the most recent year available), Philly substantially outperformed the national average for availability of affordable homes up to the $250,000 price point. Above the $250,000 price point, something incredible happens: Philly starts significantly underperforming the national average for all price points up through the $1 million+ range.


That's right: the main housing type that Philly is underbuilding relative to the nation as a whole is housing priced above $250,000. That doesn't necessarily mean we have enough housing below this price point, but it does explain why so much new construction is targeting this end of the price scale--there's actually a lot of unmet demand there.

The availability of an above-average number of homes in the $100,000-$125,000 price range also lends credence to the idea that very low-income residents are primarily having a cash problem, not necessarily a problem affording housing specifically, and that attempting to solve the cash problem using the tools of housing policy--construction subsidies, in particular--are unlikely to be cost-effective. 

Cities like New York, Chicago, and Boston have very little housing at the lower price points, but an above-average amount in the more expensive categories.




(Images: Data USA)

Suburban home prices are higher than Philly's, but stagnant

Even within the metropolitan region, Philly's home prices are still compatively cheap.

Kevin Gillen's Q1 Regional Housing Report for Drexel's Lindy Institute showed that Philly's median home prices remain the second lowest out of the nearest ten counties. We're showing the highest rate of price growth--in fact, we're the only county with a positive 10-year growth rate--but we're starting from a very low base. 




(Charts: Kevin Gillen, Drexel University)

Returning to the original question Tannen poses, regarding the sustainability of our current growth rate, would it really be that crazy if Philly eventually climbed up to somewhere in the middle of the pack, regionally, over the next several years? 

Suburban home construction is weak

Alongside the lackluster suburban home price growth, you also see a lackluster home construction picture regionally.

Friend of the blog Jake Liefer pulled the building permit data through 2016 and found that overall building activity in the Philly metro area is still lower than its pre-recession average. The suburban counties are stalled out at recession-level building numbers, and Philly is really the only bright spot.


Pasted_image_at_2017_05_13_07_27_AM.png(Charts: Jake Liefer)

On the one hand, Philadelphia is building housing at a rate not seen in recent memory. On the other hand, the city is also picking up the slack regionally, and replacing a lot of the home construction that used to be happening in other counties, since more of the regional population growth is happening in the city core.

Housing inventory is at a record low

While in the national and regional context Philly remains a relative haven of cheap housing, it's still the case that the market's been heating up, albeit from a low price baseline. Despite all the new construction, we're still seeing record low housing inventory, and very high rates of absorption.

This is really the core of the case that we aren't in a housing bubble. The more likely explanation for our rapid housing price growth is simple supply and demand: more people want to buy houses than want to sell houses. And the housing market isn't producing new houses at a fast enough clip to slow the absorption rate. 

There was only one year--2014--in the post-recession period where the number of housing units produced got ahead of the population growth rate. For prices to come down, we would need to have more years like that. But it already looks as though housing production may be slowing down, judging by the building permit data.

A tranche of large multifamily projects is coming on-line over the next couple years, and Center City District's Paul Levy says we could see a bit of oversupply, but from an affordability perspective, it's hard to see how this could be a bad thing after several years of seller's (or landlord's) market conditions. Still, we're probably talking about a dip--a few weak quarters, somewhere down the road--not a collapse in prices.




(Charts: Kevin Gillen, Drexel University)

Philly doesn't have a credible affordability plan 

Pointing out that Philly is still quite affordable in a national and regional context, despite the recent round of housing price growth, isn't intended as a call for complacency on the issue of affordability--it's a call for some perspective and a better understanding of the specific challenges Philly faces. Even though we have a lot of cheap housing, that housing is not always near the places that people most want to live, or near frequent and cheap transit to get to those places.

Places like South Philly, University City, and Fishtown and Kensington are at risk of pulling away, and becoming unaffordable for -middle-class people. Elected officials in these areas need to make their peace with (some parts of) these neighborhoods growing taller as land prices continue to climb, to keep housing attainable.


In these places, we're already messing up on the lowest possible difficulty setting. There's still a general atmosphere of low confidence in public school quality, and the jobs picture is still unimpressive, despite recent progress. The city is utterly unprepared for what would happen to housing prices if we did make major progress on schools and jobs.

The current approach to affordability, which amounts to slow-rolling market-rate housing in some areas, while wishing for more federal funding to use to overpay for the direct construction of tiny numbers of below-market units in others, are ineffective even at non-crisis levels of price growth. We need an affordability strategy that will actually work, and scale, if there's ever significant progress on education or job growth.









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