The Unraveling of the Suburban Fringe

Most of the overbuilding during the housing bubble took place in outer-ring suburbs. They are also likely the places to be hit worst by the downturn

by Prashant Gopal

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The 30 or so highway miles from Prince William County in Northern Virginia to Washington, D.C., are among the nation's most stress-inducing stretches.

The drive can last 40 minutes or a couple hours, depending on the intensity of traffic. Train service to the city is limited. And morning commuters sometimes line up for an hour-and-a-half just to be able to stand in a crowded D.C.-bound bus.

During the housing boom, the hassle of commuting was easily justified. The large, new homes going up at a feverish pace in Prince William County were a bargain compared to the older, smaller, and much more expensive condos and single-family homes in D.C. and its close-by suburbs.

A Crush of Foreclosures

Now that the boom is over and gas prices are more than $4 a gallon, Prince William County's housing market is in free fall. A crush of foreclosures have helped to force down median home prices about 32% in the last year, according to Metropolitan Regional Information Systems. Prince William County, like other outer-ring suburbs that were overbuilt during the housing boom, are now getting clobbered in these days of tight credit and scarce buyers. "We've never had a boom that lasted this long and where we've had so much growth in the economy," said Martin Nohe, a Republican member of the Prince William Board of County Supervisors. "But never has a boom ended so dramatically. When the bubble popped, it splattered all over the place."

BusinessWeek.com asked Zillow.com, which provides online home valuations, to analyze how home values have been holding up in large cities across the county compared to both inner and outer suburbs. The results are fascinating. Annual price changes in most of the largest metro areas, including New York, Los Angeles, Chicago, Miami, San Francisco, Seattle, Baltimore, Washington D.C., and Philadelphia, followed a similar pattern: Values were most stable within a 10-mile radius of the center of the city, but generally worsened with each successive radius ring as far as 50 miles from the center of the city.

Not all cities kept precisely to the pattern, in part because of the complications of geography. In Washington D.C., for example, prices started improving in the 40-mile and 50-mile rings, most likely because the area intersects with Baltimore and its immediate suburbs. Some cities, such as Boston, Cincinnati, Denver, San Diego, St. Louis, and Phoenix, did not seem to have any discernible pattern. And in other areas—Detroit, Cleveland, Dallas, Atlanta, and Reno, Nev.—the opposite phenomenon seems to be in play, with real estate values actually improving away from the city.

Much Faster Fall for New Housing

In Detroit, this might have something to do with years of economic weakness in the city. In Atlanta, the oversupply of new condos that sprouted before home prices tumbled might be to blame. "There's a pretty clear pattern of neighborhoods close to the urban core holding their values better than neighborhoods in suburban and exurban communities," said Stan Humphries, Zillow's vice-president of data and analytics. "Where there is a lot of supply and demand changes, there's a quicker effect on housing prices."

In other words, the building boom happened in suburbs, especially suburbs farther away from the cities, and that's where an oversupply of housing and lackluster demand are toppling home prices. Space for new construction was more limited in city centers and nearby suburbs.

And the subprime crisis was most pronounced in places where poorer people could afford to buy—largely in the distant suburbs where land was cheap and builders were active. In the past decade, empty-nesters and young professionals have returned to cities and have shown a willingness to pay a premium to be close to their offices and to stores, coffee shops, bars, music venues, and other entertainment. Downtowns have come to life while suburban malls are struggling.