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
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. …