Thursday, October 22, 2015

Housing, A Series: Part 69 - Migration seems to mostly be between metro areas, not within them

Recently, I compared the Zillow Home Price Index (ZVHI) to the S&P/Case-Shiller National Index to comfirm what I had found in the BEA/Federal Reserve data.  Since Case-Shiller tracks individual homes, it was overstated in the 2000s as a national price index because households were purchasing marginal new homes that were less valuable as they migrated out of high cost cities.  The difference between Zillow and Case-Shiller did seem to confirm that question.

This is a graph from that post.  As an aside, I have added two additional series here.  These are estimated ZVHI indexes for the country with several of the problem cities removed.  In previous posts, I have compared Price/Rent ratios of the C-S 10 cities with the rest of the country, but that understates the effect of those cities, in a way, because in those cities both rent and Price/Rent ratios were rising.  This graph of prices gives a sense of the full effect these few cities have on national data.

The last version, with San Diego, Boston, and Washington, DC removed, is only slightly different than the version that only removes NY, LA, and San Francisco.  Those three cities really dominate the issue.

Housing outside those six cities, at its peak, was up 64% from 1996 levels, and in 2015 is up 50%.  Over 19 years, that is an average annual growth rate of 2.2%.  This represents 85% of the country.  It is crazy enough to attribute peculiar behavior in a single market to national credit or monetary policy.  We have been attributing peculiar behavior of 15% of households in a single market to national monetary and credit policies.

Now, we can compare city specific data between Zillow and Case-Shiller.  If the data for individual cities has the same drift, then either (1) the drift is coming from some other source unrelated to migration patterns and changes in the housing stock or (2) at least some of the migration is happening within metropolitan areas, from central cities to suburbs.  If there is no drift, then this would appear to confirm that the drift we see in national data can be attributed to migration out of high cost metro areas into low cost metro areas.

And, the data very clearly lacks a long term drift within individual metro areas.  A few of the cities have slight deviations during the 2006-2010 period, which seem to mostly be related to how dislocations from the crisis, such as foreclosure sales, affected measurement.  These devations generally disappeared after the crisis.  There is no city with a drift over time, which suggests that the drift has to do with migration between cities.

Zillow also attributes the drift to their more comprehensive coverage in low-cost rural areas.  Making some very broad estimates, it looks like each of these factors might contribute about equally to the drift over time in the measures - about half due to the concentration of Case-Shiller in higher priced markets and about half due to basis shift from migration out of higher priced markets.  We can say that, however much the drift between Case-Shiller and either Zillow or the BEA/Fed is related to basis shift as households moved to lower value homes, this shift appears to have happened mostly between cities, not within them.

On the individual city graphs, I have kept the scale the same so that it is easy to see the large differences in metro area home values, and also how much of those differences have developed over the past 20 years.

New York City doesn't look that pricey here, but it really is composed of three parts.  (1) Manhattan, which is similar to San Francisco and San Jose, (2) Brooklyn, Queens, and the eastern suburbs, which are similar to Oakland, Los Angeles, and San Diego, and (3) other suburbs, generally to the north and west, which are more similar to Detroit or Baltimore.  To the extent that I can find enough data to get down to the county level, I hope to get more flavor about the different parts of the puzzle.


  1. A little OT, but in the ball park:

    Okay John Cochrane has been hoisting the NeoFisherian flag, and getting some salutes.

    It just does not hold water, I say. The ULI recently issued a study that rent inflation will be 4.6% in 2015 and 3.5% in 2016. House prices are doing what they are doing.

    Okay, with one-third of inflation in housing, how do you get 0% inflation by holding interest rates at zero?

    The NeoFisherians seem to be saying that even when multiple prospective renters show up to rent a unit, the landlords will not jack up rents. The landlords will believe there is no inflation, due to the Fed stance. Landlords also have no idea how to run a business.

    I do wish more economists would spend a few years or decades running a business. In 20 years of running small-scale manufacturing, I devoted not a thought to the Fed (business wise). It was an imponderable.

    1. To top it off, real estate is a real asset. Rents will rise and fall with inflation anyway, so especially landlords would be indifferent to inflation expectations, except to the extent that they have nominal exposure through a fixed-rate mortgage.

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