Low-Risk Study Offers Hope for City Housing Market

Article excerpt

When the Associated Press reported last month that a University of Michigan study characterized Oklahoma City as the lowest risk real estate market in the country, it sounded like good news.

That is, unless it was a polite way of saying the Oklahoma City market was just plain bad and couldn't possibly get worse.

I requested a copy of the study, finally received it this week, and the news appears genuinely good for the low risk markets.

A similar study was conducted in 1985, and for eight different cities, "low risk" translated to "prices are on the way up." And, as it turned out, five cities considered high risk in 1985 were on their way down.

"Among safe cities in 1985, eight out of eight had real price increases in the next five years," according to the report by Dennis R. Capozza, professor of finance in the University of Michigan's business school. "Perhaps surprising is the predominance of midwestern cities (five of the eight). These are cities that were avoided by investors in the 1980s but which did very well." They say it's not bragging if it's fact, so we might excuse Capozza if it appears he is patting himself on the back just a bit when he writes that his real estate risk index "appears to have considerable predictive power even when the conventional wisdom is quite contradictory." In 1985, the low-risk cities in the survey were Riverside, Calif.; Indianapolis; Toledo and Akron, Ohio; Tampa-St. Petersburg, Fla.; Las Vegas; Portland, Ore.; and Detroit. All experienced real price increases by 1990 between 2 percent and 23 percent.

The high-risk cities in 1985, according to Capozza, were New York; El Paso; Charleston, S.C.; Albuquerque, N.M.; and Miami.

"Among the high-risk cities in 1985, four of the five had real price declines over the next five years. The exception was New York, which is currently experiencing significant price erosion.

Therefore in the case of New York, the model was a bit early," according to the report.

So _ back to the new survey, which says the low-risk cities include both Oklahoma City and Tulsa, Tampa-St. Petersburg, San Antonio and Louisville, Ky. Since Capozza's list starts with the riskiest at the top, Oklahoma City is at the bottom.

"Most of the cities at the bottom of the list are cities that did poorly in the 1980s," according to the report. "Most of them had real price declines or remained unchanged. Many of these cities are in the parts of the country that had serious problems in the 1980s, particularly in the mineral extraction belt. This part of the country has had its decline and is beginning to recover." While employment growth in the so-called high risk cities is below average, the low risk cities tend to have average or above average employment growth, according to Capozza.

"This is true of Oklahoma City. The city had serious real estate problems in the 1980s. You can buy the average house in Oklahoma City for $52,000. This is a city of about 1 million people. By comparison, Hartford is also a city of 1 million where it will cost you more than three times as much to buy a house." Hartford, of course, is in the Northeast, where many of the high risk cities are located.

"Cities in the Northeast have very high prices as a result of the expansion of the 1980s and are beginning to experience real price declines," according to the report. "This is the new Massachusetts Miracle _ that the economy and the real estate market decayed so quickly." Capozza surveyed 64 large American cities, taking into account a number of factors including population, employment, income, construction costs and taxes. He found the highest risk areas are on the East and West Coasts.

"This could be the evolving trend of the 1990s _ considerable erosion on either coast, particularly in the Northeast, and relatively more activity in the Midwestern industrial areas and mineral extraction regions," according to the report. …