The Case-Shiller housing numbers came out today. I updated my chart showing the twenty different market areas.
I put in that purple line that represents the government's assessment of the rate of inflation. In the long run, one would think that housing should keep up at least with the rate of inflation. If it's too much above that rate, you might still be in a bubble scenario. If it's less than that, it's reasonable to believe that your downside risk is less, if there isn't something special that is driving prices down.
So when I look at Atlanta, I see that prices are only 9% more than what they were in 2000. Inflation has increased by 26% since then. That means the house prices haven't even kept up with inflation. The unemployment rate for Atlanta is 10.5%, just a little higher than the national average. Atlanta has a very diverse job base so it isn't affected much by any particular industry doing badly. If I were an investor and had to pick a market with good potential and limited downside risk, I'd probably pick Atlanta.
Let's compare that with Los Angeles. Housing is still 76% higher than in the year 2000. The unemployment rate in Los Angeles County is 12.3%. They have seen a bounce of 10% in house prices since the lows in May of 2009 but I would be reluctant to invest in real estate there if I were an investor. I believe that the downside risk is just too large. To get them back to the rate of inflation would take another 28% drop from current prices.
Washington DC is still pretty pricey with prices having bounced back by 13% since the lows of March 2009. The unemployment rate is 10.5%. I would think that government is the big employer there and I would think that in normal times it's safe to bet that government isn't going to downsize. But, with the small government Tea Partiers making a run at it, maybe we'll see some downsizing after all. At least it's a risk that has to be considered.
San Diego and San Francisco are two other areas that are still priced pretty high and both have seen significant bounces off their recent lows. I'm not certain about employment but the high prices alone just would make me nervous about the potential downside risk.
Of course I'm biased about Atlanta. But when you look at things objectively, it's easy to come to the conclusion that if one wanted to invest in real estate, Atlanta would be a pretty good place to do it.
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