How Big Cities Will Weather the Housing Slump

Posted by: Chris Palmeri on February 27, 2008

A new report from bond rating agency Standard & Poors says the finances of the nation’s largest cities should be able to withstand the housing slump. Yes, I know, S&P has been criticized for not calling all the trouble in subprime mortgages early enough. The report does have some surprising stats about the nation’s largest cities.

detroitDid you know that 80% of the nation’s 301 million residents live in urban areas? About 10% live in the ten largest cities. That’s despite the fact that three of the largest saw their populations shrink over the past three decades—Chicago, down 5% to 2.8 million people, Philadelphia, down 14% to 1.4 million and Detroit, ouch, down 27% to 870,000.

Contrast that with Phoenix, whose population is up 91% to 1.5 million. San Antonio’s is up 65% to 1.3 million and San Jose (who knew they were even in the top ten?) up 47% to 929,000.

S&P notes that although all cities are impacted by housing price declines, each city varies in the amount of money it generates from property taxes. Dallas, for example, gets 42% of its municipal revenue from property taxes; Philadelphia, just 6%. Moreover, cities in California may not be hurt as much as one would think because increases in home appraisals have been limited under the state’s famous Proposition 13.

The report concludes that most of the big cities should weather the housing bust. Among big cities, Phoenix has probably seen the biggest drop in home prices and sales, but S&P concludes that previous conservative municipal management coupled with recent action by officials there to trim spending should allow Phoenix to maintain its triple A credit rating. That’s the highest rating among the big cities (another surprise there).

Reader Comments

Jim D

February 28, 2008 6:28 PM

I agree about Prop 13 limiting the effects of declining property taxes - But the California cities with the largest increase in property values also saw massive increases RE-related employment.

In California, 1 in 80 people are licensed RE Agents.

What's going to happen to sales receipts when all those people finally give up their profession, after not having made a sale all year? When all the mortgage brokers go away (we're getting about half way there), when the construction sites go silent (getting there, also), how will that effect income tax receipts?

Yes, Prop 13 will reduce some of the problems from decreasing property values, but the state gets lots of revenue indirectly from property values as well (and I haven't even mentioned MEW cashouts). That's all going away, and to ignore it as the above analysis does is either deliberate obfuscation, or reckless incompetence.

Given that we're talking about a rating agency that thinks that the monoline insurers are still AAA OK, and that it's the same agency that rated a lot of those junk-level CDO's as AAA, it's a tossup as to which it is - seriously, shouldn't these guys have as much credibility as the NAR now?

Don Reynolds

March 1, 2008 12:39 AM

Phoenix will most likely see the fastest recovery of large cities for a few reasons.

1. It is more affordable than Southern California.
2. It has a more diverse economic base than Las Vegas.
3. It is in a "Disaster Free Zone" without earthquakes, floods, tornados, hurricanes, mud slides, and tornados.
4. With the introduction of Light Rail Transportation, seniors will find it more attractive to retire or spend winters in Phoenix.
5. The new Heart Institute and Medical Center in downtown Phoenix will further add to the attraction for senior (don't forget Mayo clinic).
6. Major sports centers, bowl games and the Cactus League.

Sure it's really hot in the summer. But the 2nd home market should help decrease the excess builder home inventory, as well as the 69 million baby boomers who are now retiring.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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