Is there a local housing market whose performance indicates how well the national housing market will do? If so, could we use such a market to anticipate the next big real estate boom or bust? The idea of having a “crystal ball” local housing market is certainly an attractive one; the mayhem caused by the 2007-2008 housing bubble could have been avoided (or, at the very least, mitigated) if the real estate industry and the U.S. as a whole knew it was coming.
To find out, Trulia’s Chief Economist Jed Kolko looked at home price changes between 1980 and 2014 in the 100 largest U.S. metros and compared them to U.S. home price changes over the same time period. Each metro was given a “crystal-ball score” that shows the correlation between its year-over-year home price changes with the year-over-year home price changes in the national market one year later.
The crystal-ball score correlations range from 1 to -1. Strong positive home price changes in a metro with a crystal-ball score of 1 would mean that the U.S. housing market would also experience an increase in home prices one year later. On the other hand, a sharp decline in home prices in a metro with a crystal-ball score of -1 would mean that the U.S. housing market would experience an increase in home prices one year later – the opposite of what happened in this metro.
Continue reading to learn if Jed did ever find a “crystal ball” housing market – or if such a magical market sadly does not exist.
Highest Correlations Between Local and National Home Price Changes
- Minneapolis-St. Paul, MN – 0.79
- San Diego, CA – 0.76
- West Palm Beach, FL – 0.76
- Cape Coral-Fort Myers, FL – 0.73
- Ventura County, CA – 0.73
- Washington, D.C. – 0.72
- Sacramento, CA – 0.72
- Palm Bay-Melbourne-Titusville, FL – 0.71
- North Port-Bradenton-Sarasota, FL – 0.71
- St. Louis, MO – 0.71
The 10 metros with the highest crystal-ball scores can best be described as an “eclectic” list. They include St. Louis in the Midwest, Washington, D.C. on the Atlantic seaboard, several California metros out West and four Florida metros, including lesser-known ones like Palm Bay-Melbourne-Titusville.
But the metro whose housing market trends are most closely correlated with overall U.S. housing market trends is Minneapolis-St. Paul. (Of course, its crystal-ball score of 0.79 means that it’s still far from being perfectly correlated with the U.S. as a whole.)
Lowest Correlations Between Local and National Home Price Changes
- Baton Rouge, LA – -0.02
- Houston, TX – 0.02
- San Antonio, TX – 0.03
- Austin, TX – 0.03
- Tulsa, OK – 0.04
- Oklahoma City, OK – 0.05
- Salt Lake City, UT – 0.06
- El Paso, TX – 0.06
- Greenville, SC – 0.14
- Buffalo, NY – 0.22
The metros whose local housing market trends are the least correlated with national housing market trends are predominantly located in and around the Gulf states. Four of the top 10 least-correlated metros are located in Texas (and two more, Dallas and Fort Worth, rank 11th and 13th, respectively).
So what’s up with Texas? It was one of the states least affected by the housing market bubble burst in 2007-2008, and it had relatively low home prices during the mid-1980s when the median U.S. home price jumped 47 percent between the beginning of 1984 and end of 1987. One possible reason why Texas is out of sync from the rest of the U.S. is that, because Texas’s economy is largely based on the energy industry, its home prices are influenced by changes in energy prices. When business was booming for the energy industry during the late 2000s, Texas home prices avoided the fate of prices throughout rest of the country. Texas home prices were at their worst during the mid-1980s, when gasoline prices plummeted.
Takeaway for Real Estate Professionals
There is no shortcut for understanding the U.S. housing market, at least in terms of using trends in your local market to predict larger national trends. No local market – including yours – consistently and reliably predicts next year’s national home price trends.
Takeaway for Consumers
Regardless of how much home prices are rising in your area, don’t assume they’ll also increase throughout the rest of the country. It is difficult to know where home prices are heading, so don’t get lulled into a false sense of security by your high-performing local market.
This is a summary of a Trulia Trends blog post. Click here to read “Can Any Local Market Predict National Home-Price Trends?”