Heat Islands or Hot Air?

"So why does downtown Philadelphia, a city of the Industrial Revolution and before, have so many construction cranes? And why are people moving back to cities large and small all across the US? Why, for that matter, are for-sale signs popping up out in the exurbs faster than the losses are piling up at Citigroup and Merrill Lynch?"

That's a good question but I'd prefer to see some more statistics besides construction crane and foreclosure sign counts to give us poor readers a chance to think about how big the trend is and how widespread. Anecdotal evidence doesn't convince me. His best guess for seeing a trend toward infill development seems to be global warming and the rising price of oil.

"Everybody’s talking about global warming, for one thing."
The mere idea that there's a trend away from suburbia and back the cities due to heightened environmental awareness is baseless. A survey of new home buyers would have more telling and I couldn't find anything on the Internet to back the author's claim that global warming to be the primary motive but I did find the opposite, an increase in consumers wanting two car garages. That would also seem to run counter to rising gasoline prices but most people are painfully aware when gas prices go up so that has to be factor.

"The 2007 Profile of Buyers' Home Feature Preferences found that buyers preference for oversized garages (two car or more) was increasing more than their preference for any of the other 75 home features and room types on the survey." The article also mentions a stronger interest from consumers for energy efficiency so there's some hope for the greens.
http://www.mortgagenewsdaily.com/8152007_Home_Features.asp"

A better article from the link seems more plausible in explaining why there's more folks heading back to the cities if that is the case.
http://www.shoprate.com/blog.aspx?id=11

"* Exurban housing activity has been strongest in metro areas where affordability is low.
* During the boom, home prices in some distant suburbs rose nearly as much as city centers.
* More recently, the housing slowdown has hit some exurban communities particularly hard.

Seeking refuge from rising home prices, many homebuyers have opted for more affordable housing in the suburbs. Prices in the suburbs are generally lower for homes of similar quality — as the distance to the urban core increases, prices generally fall. In some extreme cases, homebuyers seek residences in exurbs — particularly distant suburbs — to find affordable housing; the majority of these homebuyers tend to be lower-income households. Exurban housing activity has been strong around all major metro areas, but has been strongest in metro areas where affordability in closer-in communities has deteriorated the most.

Given these dynamics, it's worth asking whether suburban and exurban house prices matched the gains seen in inner cities and closer-in communities in recent years. Could lower-income homebuyers indeed find more affordable housing in exurbs, or did the boom price out new homeowners in places they would traditionally look for housing?

To answer this question one can look at data on urban and suburban house-price appreciation in major metro areas in the United States. These data were published in a recent research note by OFHEO, which did a limited, but still useful comparison of price trends in suburbia to trends in city centers.

The first chart plots house price appreciation rates for different parts of the same city, with appreciation shown in the urban core shown on the left. The extremely close relationship between appreciation rates during the boom years is striking; although appreciation rates were generally lower for more distant suburbs, the difference in growth rates in the city center and outlying areas was minimal in every city.

The second chart plots house price trends over the past year, and shows the impact of the housing slowdown has been particularly intense in some exurban communities (notably those around New York, Los Angeles and Miami), while the effects have been relatively symmetric in other cities.

What is it about New York, Los Angeles and Miami that made recent price growth in their exurbs so much weaker? The OFHEO report finds that in these three metro areas, prices were high at all distance intervals; distant suburbs did not offer any affordability relief. The price/income ratios in these metro areas were 7.2, 11.4 and 7.6, respectively during 2005Q3 (the height of the housing boom), versus 4.8 nationally. Moreover, the ratio of the average level of house prices in the exurbs versus those in the city center was 0.94 in New York, 1.73 in Los Angeles and 0.98 in Miami, suggesting that prices in the exurbs were on par or higher than prices in the urban core.

It seems that distance provided little affordability relief in these metro areas, and that some households did indeed get priced out — or would have, if not for the aggressive use of subprime lending and exotic ARM loans. As these sources of credit weakened in 2006, so did demand in these areas, resulting in a more rapid deceleration in house price appreciation than in closer-in communities where conventional lending has been more dominant.

The outlook for prices in these exurban markets is likely more bleak than it is in closer-in communities. Both ARM resets and high gasoline prices are pinching the pockets of many exurban households, increasing the chances they will fall behind on loan payments. The resulting credit problems will put further downward pressure on house prices in these areas, as foreclosures add to the stock of unsold homes."