The cure for overheated real estate markets: snow, and lots of it.
I'm sure you've been wondering what lessons Buffalo can teach us about eliminating irrational exuberance from real estate. After all, you've noticed that Buffalo never shows up on anyone's top-10 list of foreclosure hotspots or markets doomed to imminently self-destruct in a fiery fireball of flames. And I'm sure you've noticed that Buffalo ranked sixth nationally in home price appreciation in 2009. You've had Forbes housing reporter Francesca Levy entreat you to "look to these municipalities [Buffalo, Omaha, Wichita] as thought leaders for cities seeking to avoid another bubble".
So take that! frothy coastal markets, and you know who you are. Real estate's done right down Buffalo way (motto: "The Buckle on America's Rust Belt") smack dab in the heart of America's heartland. Or so says a report issued by two economists (and homies), Jason Abel and Richard Deitz, of the New York Federal Reserve.
In fact, not just Buffalo, but all of upstate New York, is doing fine real-estate wise. In fact, most of America's heartland is doing fine. What's its wholesome down-home secret? What lesson can the heartland impart to the volatile, decadent markets on the geographic and cultural fringes?
One word, say economists Abel and Deitz: subprime (or, rather, "nonprime"). According to the March 30 Wall Street Journal article "Much of U.S. Was Insulated From Housing Bust", "the authors say a lack of nonprime lending in these areas played a prominent role in insulating them from the boom and bust. 'It is likely that causation runs in both directions—an increase in nonprime lending led to more significant home price appreciation [in boom areas], and more rapid home price appreciation led to a rise in nonprime lending', the authors state".
Yes, you heard right: "it is likely" that the real estate dog was chasing its tail, up and up and up. A flood of nonprime loans drove up home prices, which necessitated even more nonprime loans, which drove up home prices even more, which &tc. &tc. and so forth and so on.
Which certainly sounds "likely". Which is why you should question whether it's the whole story, or even part of the story. And why you should wonder if the economists have, yet again, mistaken the symptom for the cause.
I don't have any special insight into the heartland's real estate markets, which fact may qualify me as a real estate economist. But I can tell you about the effect of subprime, sorry, "nonprime" on real estate in this area. And, yes, nonprime did fuel our low-end market, not entirely, but enough, and more than enough during the final days of the boom from 2005 to early 2007. But, no, nonprime didn't fuel our midrange market, not entirely, not even enough to make a teensy difference. As for our top end, no, not even Countrywide was making nonprime loans on multi-million dollar properties.
How do I know this? Because I know that for the past several years our low end has been awash in bank-owned homes and short sales, our midrange barely touched by them, and our top end even less so.
But home prices certainly shot up here during the boom, and not just at the low end, but in the midrange and, to a lesser extent, the top end. So what gives? If nonprime is the culprit for the manic highs and depressive lows chronicled in 72-point headlines, then why did all local real estate achieve ecstasy, not just the low end? And why did our low end self-destruct in a fiery fireball of flames, while our midrange and top end did no such thing?
Or, to get back to the New York Fed's report, why was upstate New York sheltered from both boom and bust? Was it the relative absence of nonprime, or was this only a symptom? And what homely lesson, if any, can this region impart to less-steady real estate markets?
You see glimmers of it in the report:
I think you get the idea. Upstate New York is declining, and for all I know has been since railroads supplanted the Erie Canal as the latest in transportation technology. Jobs and people are leaving. How's the climate? Somewhere in the back of my mind I remember that upstate gets more snow than just about any place in the U.S. except Mt. McKinley. And, sure enough, according to the NOAA's National Climatic Data Center, Buffalo gets 93.6 inches of annual snowfall (including ice pellets and sleet). Rochester gets 92.6 inches, Syracuse an ample 115.6. San Francisco's average? "T", which I assume means "trace". And even if it doesn't, I'm pretty sure that snow shovels are a "special order only" item in City hardware stores.
I think you get the idea. Buffalo may be a fine community, but no one's busting a gut to live there. Buffalo is not a buyer magnet. On the contrary. So may I suggest that it wasn't a commendably level-headed attitude toward nonprime loans that kept Buffalo on a nice even keel while parts of both coasts and the Sunbelt bounced off the walls. May I suggest, instead, that buyers aren't Pavlov's dogs conditioned to salivate at the sight of nonprime loans. Rather, booms are fueled initially by some real and compelling benefit—jobs, climate, lifestyle, the promise of a better life—and that only when booms reach maturity or even senility do a significant number of buyers, the ones left behind, start reaching for nonprime loans.
Here's upstate's wholesome secret: its real estate isn't a train wreck because it never left the station. Sorry, Buffalo, but if there's no there there, compared to, say, the San Francisco Bay Area, you won't have the sustained, overwhelming momentum that, in this area, eventually priced credit-challenged and less affluent buyers out of prime neighborhoods and into the cheaper Central Valley, now a top-10 foreclosure hotspot. There won't be the momentum that, in this area, eventually forced the credit-challenged and less affluent into nonprime loans guaranteed to soon be non-performing loans.
Buffalo's lesson in a nutshell? Dim prospects. Because it's hard to work up a decent real estate frenzy when buyers keep leaving for greener pastures. And snow, lotsa snow. Because it's hard to get the real estate bandwagon going when it's stuck in 93.6 inches of snow.
Buffalo, a real estate example not necessarily worth emulating, a "thought leader" not necessarily worth following.