Global Insights

Growth in 2019? Look at US Housing Values

11 Dec , 2018  

As the end of 2018 soon closes, all eyes are turning to the prospects for economic growth in 2019. As seemingly always, growth comes from the US housing market or results in reinvestment in the US housing market. In either case, we see growth in or through the US housing market. People make more and buy more expensive homes. People make more because people are buying more expensive homes. It is like the chicken and egg problem. It doesn’t matter, which comes first, economic growth or housing growth. Each needs the other to grow. There are some strong head winds to housing in 2019, and certainly not all parts of America are seeing the same housing market prosperity. Rising interest rates and changes in tax policy will hit real estate in 2019 negatively. Is there enough income growth to overcome these headwinds? I have not seen it. Let’s examine some interesting graphics and data to reveal what has happened and what might happen in 2019.

First, what does it cost to buy a house in various parts of the US? The variation is tremendous, which exposes that our economy is really local not national, yet we have national interest rates and nearly a singular national mortgage policy. Homes are a driver or certainly derivative of the local economic condition.

Next, let’s consider the new tax law that caps mortgage interest deductions and state and local taxes. It is expected to have a highly negative impact on  urban areas, with high local taxes and low to moderate economic growth. It’s not looking so good for the Northeast and Midwestern cities.

Let’s look at the projected impact of the tax change more closely. Here is graph that shows the areas of the US that have benefited in the past from generous tax deduction from mortgage interest and local taxes. Almost all urban areas are hit hard in the new tax policy.

But, it is fair to say that the cost of living is different across the country. It costs less to live in rural, small town areas than in San Jose, for sure. Let’s look at that:

Again, urban areas, not surprisingly, are most expensive.

Let’s examine how personal income has performed across the US. Yes, urban areas have grown, but there is also growth in the west and Florida. The rust belt states and much of the middle of the US have seen lower personal income increases.

The US has been experiencing a long-term migration of people to the west and Florida. The availability of highways and affordable air condition made this migration attractive. People also moved to get more valuable land, for new and better paying job, and to get away from the snow. Today, there are many reasons for people to leave the Northeast and Midwest: large state debts, slow income growth, and now abysmal real estate appreciation. Check out the population growth since 1950 by state.

Here is the famous Case-Shiller index. Indeed, the winners are those in the west and Florida. Many under-performing places in the Northeast and Midwest.

Here is a nice graphic that shows the number of days one needs to work to afford housing in location. In pricey places, Americans must work more to own a home. Obviously, don’t retire where it is pricey to own property.

As we enter 2019, housing prices are hottest in the west and Florida, but there has been some slowing of the housing marketing due to the increasing interest rates. We should expect property values in the Northeast and urban Midwestern cities to be hit hard due to the impacts of the new tax policy. Increases in the interest rate (to control inflation, presumably) will not help in any of these areas. Since most Americans have their personal wealth tied-up in their home and other real estate, expect 2019 to be a challenging year, unless you are in a delightful spot in the west or Florida.

Perhaps interest rates should be significantly lower in places like Chicago, Detroit, and Cleveland in order to spur people to move (or stay). Maybe higher interest rates would regulate growth in California or areas that need to examine housing solutions. The one shoe policy for interest rates does not work in such a varied housing market. Policy makers should look more closely at the impacts of interest rate policy on local communities.

Professor Walker provides keynote talks, seminars presentations, executive training programs, and executive briefings.

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About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University. He has worked with many professional sports teams and leading marketing organizations through the Analytical Consulting Lab, an experiential class that he founded and leads at Kellogg.

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His most recent and award-winning book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data through digital strategies. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

 

 

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Russell Walker helps companies develop strategies to manage risk and harness value through analytics and big data. He has done novel research in data monetization and digital disruption and advises leading firms on these topics. As Director of Experiential Learning in Analytics an Senior Lecturer of Marketing and International Business at the Foster School of Business, at the University of Washington, Dr. Walker is an academic thought-leader on analytics. Russell Walker has developed and taught leading executive programs on Big Data and Analytics, Strategic Data-Driven Marketing, Enterprise Risk, Operational Risk, and Global Leadership. Previous to moving to Seattle and the Foster School, Dr. Walker was Clinical Professor at the Kellogg School of Management of Northwestern University, where he founded and taught many popular courses in analytics and risk management. His is the author of the book From Big Data to Big Profits: Success with Data and Analytics (Oxford University Press, 2015) which examines data monetization strategies and the development of data-centric business models in the new digital economy. He is also the author of the award-winning text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management as a competitive advantage. Dr. Walker consults with firms on the topics of Big Data and Analytics, Data Monetization, Risk Management, and Business Strategy. Russell Walker can be reached at: russell@walkerbernardo.com @RussWalker1492 russellwalkerphd.com



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