1. Markets that skyrocketed in the bubble, crashed hard (30% or more) and have yet to recover (examples: Miami, Las Vegas).
2. Markets that skyrocketed in the bubble, crashed hard and have rebounded smartly (example: San Francisco (down 46% from peak, up 21% from bottom).
3. Markets that rose and fell more moderately, and are recovering (example: New York).
4. Markets that didn't experience the bubble or the crash and recovery (example: much of small-town America).
So, while the national median home price is $176,900, up from $166,400 in early 2009, the local numbers are far from uniform. Out of 155 metropolitan areas tracked by the National Association of Realtors, 100 rose in the second quarter of this year, 14 by double digits. Yet prices in some markets, such as Las Vegas, are still declining.
Nationally, prices have risen 6% from their April 2009 bottom, but they're still 28% below their July 2006 peak.
Cutting Through the Cacophony
There's a big hurdle in trying to make sense of any housing market: The data come from different sources, and it often mixes different metrics. For instance, by at least one firm's calculations, the average price of a Manhattan apartment is about $1.43 million, up from $1.31 million -- but when measured on a per-square-foot basis, prices are flat.
One way to make sense of the cacophony of conflicting national data is to compare two sample cities such as New York (relatively stable valuations) and Los Angeles (big bubble and crash, sharp recovery).
New York City homes prices fell a relatively modest 15% in 2009, according to Corcoran Group, a New York broker. Other firms pegged the decline at 10% to 11%.
From 2008 to the 2009, the average Manhattan apartment fell about 20%, from $1.03 million in 2008 to $810,000 in the fourth quarter of 2009. On a square-foot basis, Manhattan home prices declined 17.6%, while new developments dropped 22%.
According to the second-quarter Case-Shiller Index of home prices, New York City prices edged up a modest 0.2% year-over-year (this is for the entire city, not just pricey Manhattan).
What Happens Next?
While that 20% decline in a Manhattan apartment may appear steep at first glance, it's moderate compared to the nearly 50% collapse in Los Angeles home prices that occurred from the peak in 2007 to the bottom in early 2009. From under $200,000 in 2000, L.A.-area homes rose to almost $550,000 in 2007, and then fell below $300,000 in January 2009.
Representative of markets that got plummeted but are recovering sharply, L.A. prices have risen a robust 9.2% over the past year, according to the Case-Shiller Index.
The question in both New York and Los Angeles is the same: What happens next? Is the price stabilization temporary, merely a pause in a long decline? Or is the recovery solid, with prices rising from here?
To answer that, we have to look at the economic foundations of each city, the supply of housing in various price segments and the demand from willing buyers.
Take a Closer Look at Jobs
Common sense suggests no housing market can rise if employment in the area is still declining. Thus, the relative price stability in New York might well result from the city's employment recovery, in which it added 48,500 private sector positions in 2010. After losing 35,000 jobs in the financial sector in the wake of the global crisis, financial services employment has actually nudged up by a modest 500 jobs in 2010. The city's unemployment rate held steady at 9.4% in August, slightly lower than the current national average of 9.6%.
The Federal Reserve's recent Beige Book report noted strength in a key New York City industry: tourism. Occupancy rates remained close to 90% in July and August, even as the number of hotel rooms has risen by more than 5% over the past year and room rates are 10% to 15% higher than a year ago.
The report categorized New York real estate prices as "essentially flat in Manhattan and across New York City generally."
California, however, is still mired in a jobs recession, as employers shed another 33,500 positions in August, pushing the state's unemployment rate to a bloated 12.4%.
According to a recent report in the L.A. Business Journal (print only), Los Angeles County home prices rose in August, and brokers are reporting a return to the multiple-offer-mania of the go-go era in desirable neighborhoods. Prices in some ZIP codes in Glendale, Hollywood and Santa Monica have experienced year-over-year increases as high as 40%.
How can a region with 12% unemployment support such strong price and sales increases?
Who the Buyers Are
One source of strength in both New York and Los Angeles is non-U.S. investors who see prime U.S. real estate as a relative bargain. Michael Nourmand, president of Nourmand & Associates Realtors in Beverly Hills reports that Chinese investors have been active in the Beverly Hills area, largely replacing European buyers.
In New York City, foreign governments and agencies are on a buying spree, snapping up multimillion-dollar Manhattan properties.
Another pool of buyers has taken advantage of low-interest, low-down-payment FHA loans. In Southern California, 36% of sales in August came from FHA-insured loans.
But who can afford condos in Manhattan for $1.4 million, and bid up houses in the desirable Silver Lake district of L.A. with multiple offers over $800,000?
The answer may well be that the top 5% of American households that are doing well despite the recession are concentrated in cities such as New York and Los Angeles. As I reported in August, the income and assets of the top 5% -- those households earning $210,000 or more annually -- have risen even as earnings of the bottom 95% have stagnated.
No Guarantees of Future Appreciation
Despite the largely rosy sales and price increases in both New York and Los Angeles, some recent signs indicate that the housing markets in both locales could soften. Sales have slipped sharply in some L.A. neighborhoods: The Sherman Oaks ZIP code 91403 saw sales fall 76%, from 91 properties in July 2009 to only 21 in August 2010.
The "shadow inventory" of distressed homes kept off the market by lenders remains high in many markets, meaning a flood of supply still threatens to overwhelm declining demand.
The larger question might well be: How many of the top 5% slice of U.S. households are still anxious to buy at today's prices? If the answer is "plenty," then $1 million homes in Manhattan and exclusive areas of L.A. will continue holding their value. But if demand for housing in the top tier of households falters for any reason, so too will prices.
Foreign buyers can run hot and cold as well. If the global economy slips or currency valuations suddenly change, non-U.S. buyers with cash may suddenly become scarce.
In today's uncertain world, past performance is no guarantee of future performance, even in seemingly solid markets.