The divergent trends in home prices in those two cities — and the 18 that fall somewhere between — are tied to the peculiarities of each metro area and show why for all the government efforts to get the housing market back on track, such as mortgage relief programs and low interest rates out of the Federal Reserve, any bounce back in the sector has been halting and uneven.
Housing is funny. In theory, it is a small piece of the economy. Residential investment has averaged less than 5 percent of economic activity over the past 60 years and is currently a minuscule 2.2 percent of gross domestic product.
Yet it has a strangely dominant role in fueling, or even creating, economic swings and has an even larger place in the American psyche. It is the most volatile portion of GDP, almost always swinging wildly and making economic highs higher and lows lower. It is a consumer good and a financial asset: People buy homes to live in but also expect them to be a store of value over time. The mortgage loans for which homes serve as collateral form part of the backbone of the financial system, as the world learned all too well starting in 2007.
Local governments place zoning and other land-use restrictions on how many homes can be built, which means that supply will not necessarily keep up with demand. (If demand for Ford Focuses rises, Ford builds more of them; if demand for condominiums in San Francisco rises, if more are built at all, they will come only after long and expensive delays.) Finally, home sales have an outsize effect on other consumer spending; someone who buys a new house is likely to fill it with furniture and appliances, for example.
Given all that, the old saw that all politics is local could be applied even more clearly to housing.
For the 20 metro areas covered by the Case-Shiller index, I pulled data on job growth over the past year and housing permits issued to get a sense of how these three measures — one of home prices, one of job growth, another of change in the rate of housing construction — interrelate.
The simple answer is, unpredictably. You might expect, for example, a tight relationship between job growth and changes in home prices. In fact, the correlation between those numbers is only about 40 percent. (The relationship between change in housing starts and change in home prices is even weaker, with a 21 percent correlation.)
But that doesn’t mean there are no patterns.
Solid economies, housing weakness
First, the rate of home construction has surprisingly little to do with prices. The worst market, Atlanta, featured a 9.9 percent drop in home prices over the past year, yet the number of housing permits issued in the first seven months of 2012 was up a whopping 78 percent from the same period a year earlier. Atlanta appears to be a case in which builders are getting ahead of the market; it is a city with middling job growth, yet they are building homes at a breakneck pace, sending prices down.