US housing markets - strongish centre and weak periphery

The most recent Case-Shiller house prices (October data) for 20 cities in the US came out a few days ago. The overall impression is that house prices have begun to slowly weaken again following the expiry of the tax credit in April. This is relevant for the broader economy in terms of likely additional loses on loans, new building activity, wealth effects etc.

Previous patterns in house price movements between cities mainly reflected those that had booms versus those that didn't. Basically those that had big booms in the 2000's had big busts from April 2006 to May 2009. Those cities that missed the big booms didn't have big busts. Then from about May 2009 to May 2010 prices stabilised helped by government programs that propped up the housing market, lack of new house building, lower house prices, lower interest rates etc. An interesting new trend that is emerging is that the recent trends in house prices do not reflect the previous boom/bust cycle but rather the cities that are at the centre of the political/financial world are holding up while those that are at the periphery are falling.

Let's look at the figures over the last 5 months. New York and Washington are the only cities where prices are basically flat. Non boom/bust cities Portland, Cleveland, Minneapolis, Atlanta, Dallas down 4 to 6%. Although some boom cities are again trending down significantly (e.g. Phoenix (-8%), San Fransisco (-4%)) they are certainly not weaker as a group than the non boom/bust cities. So this recent weakening in prices is not largely related to the bust of the big booms, sub prime lending etc. but rather local economic weakness, high unemployment, high debt levels etc.

Looking back longer term we also see more evidence of the same pattern. In Washington and New York prices have only dropped around 25% since the boom peak. In other cities that have had booms the price drops have been 37% to 58%. So again Washington and New York stand out as the cities where prices have been relatively strong. So why? Well my first impression is simply that these are the cities where the economy has been propped up the most by the federal government. Clearly the financial services industry centred in New York has been propped up, big bonuses are back etc. While the federal bureaucracy which centres on Washington has been sheltered by keeping spending strong to cushion the impacts of the recession.

Clearly the data supports those who believe the federal government have helped those in the financial services industry and the federal bureaucracy system a lot more than those in "main street" who are far from the centres of power. Sadly even those who did nor enjoy the fruits of the unsustainable boom will continue to feel the lingering impacts of the bust in terms of weaker house prices and high unemployment. This picture fits in well with the broader disillusion of main street with wall street and established politicians.