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| Where Are the Recession Proof Housing Markets? |
| Written by Jonathan Smoke | |
| 10.08.2007 | |
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Discuss this article on the forums. (0 posts) As our readership has grown, we increasingly receive some very thoughtful inquiries and suggested future articles and research ideas. A very simply stated question came over the transom yesterday: “Where are the recession proof housing markets around the country?”  My immediate thought was “Define recession proof?” Does that mean immune from recession; or does it mean able to stay relatively strong even in a recession?The easiest answer was the identification of markets least likely to suffer from a recession in their local economies. We have completed numerous studies using both clients’ financial profit information as well as external definitions of housing success to test against economic metrics and we repeatedly identify a handful of metrics that should always be followed relative to housing. These metrics—including household income growth, job creation, unemployment growth, bankruptcy rate, and a few others that are all reported in our Market Dashboard reports—tend to correlate well with a strong housing market, defined as growing units sold and increasing prices, and also translate well to returns on investment in residential land and development. So I took the Local Economy Index component of our recently released Housing Prospects Index to look specifically at the markets expected to have the most resilient economies through 2012. The Local Economy Index specifically ranks each MSA relative to each other on the balanced outlook for income growth, job creation, and unemployment growth. When you look at the markets scoring the highest on this index, you see economies that are firing on all cylinders and are expected to do well for at least the next five years:
If you could only use one piece of intelligence to make a market investment decision, economic prospects would likely be the best to use. As long as the national economy doesn’t go completely haywire, these markets should be most resistant to an economic downturn. Answering the second interpretation of the question and identifying markets that perform well despite potentially hazardous economic conditions was a bit harder to consider. I turned to my economist colleague, Bill Russell, for his thoughts. He gave me a typical economist answer—give me some time to build a model and I can give you a robust answer. The blog schedule won’t allow for that time at present, but I promise I will follow up on this as we do have more analysis to share. In the mean time, Bill did point me to an excellent paper written in 2006 by three economists and members of the National Bureau of Economic Research. In the paper, "Superstar Cities," authors Gyourko, Mayor and Sinai propose and analyze a framework for classifying markets according to “superstar” status—superstar cities being where home prices appreciate at significantly higher rates than non-superstar cities and low demand cities. Keys to this superstar status are a scarcity of new home production, desirability, and growing incomes nationally such that incomes grow locally and a relatively higher concentration of higher income households move into the area. So, if you want to skip to the answer before we can get to it, identify markets where the price to rent ratio is higher than the average for the U.S. and is growing, where home price growth is outstripping new housing stock growth, and where households moving into the area represent a much higher concentration of the highest income households. These markets should outperform others over the long term despite how the national economy performs. 
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