When adjusting for inflation, home prices in Cleveland, Chicago, Detroit and seven other U.S. metropolitan areas have declined over the past quarter century, exceptions to the real estate adage that long-term ownership builds wealth, a new report shows.
Since January 2000, the inflation-adjusted expected price in Bridgeport, Connecticut, has fallen 14.3% to $298,909, the largest drop of the 10 regions, according to research by professors Ken Johnson of the University of Mississippi and Eli Beracha at Florida International University. The inflation-adjusted expected price is the average value that would have been with no inflation.
Chicago; New Haven, Connecticut; and Cleveland also posted double-digit declines over the 25-year period, the Beracha and Johnson Real Estate Initiative shows. Hartford, Connecticut; Baton Rouge, Louisiana; Akron, Ohio; Detroit; New Orleans; and St. Louis had smaller losses. The research covers single-family homes, townhouses, condominiums and co-ops.
U.S. homes traditionally appreciate by about 4% annually, and consumers have long believed that buying a house and building equity for five or more years is the best way to accumulate wealth. But that's not a foolproof plan for everyone, Johnson said in an interview.
"While home prices are up significantly post-COVID, long-term home pricing trends are down in these 10 regions," Johnson told Homes.com. "These markets offer strong evidence that real estate shouldn't be the primary source of savings for American families."
Residents in these 10 areas would have been better off renting a home and reinvesting the money they would have spent on home repairs, property taxes and other costs associated with homeownership, according to Johnson.
Rust Belt hardship plays a role
"Working with inflation-adjusted prices gives us a far better sense of how home prices are actually performing and, therefore, gives us a better understanding of wealth creation from homeownership and the tradeoff between owning and renting," Johnson said.
The long-term price declines in some of the 10 regions are no surprise, given Rust Belt economic hardship and other factors over the past quarter century, analysts say.
For instance, job and population growth in Cleveland and Akron, Ohio, have suffered since 2000, noted Veronica Miniello, associate director of market analytics for CoStar and Homes.com. Economic development officials say housing affordability in the two regions is not the issue, but rather robust salaries, she added.
In Connecticut, Bridgeport, New Haven and Hartford have experienced urban decline, with some neighborhoods facing poverty and crime rates above the national average that depress home values and discourage reinvestment, according to Erika Ludvigsen, national director of residential analytics for Homes.com.
In 2005, Hurricane Katrina destroyed a significant portion of New Orleans' housing stock and displaced a portion of the population, while repeated flooding in Baton Rouge has hurt its long-term home value appreciation, she added.
Still, homeownership should remain a goal for consumers across the vast majority of the country, Ludvigsen said in an email.
"I believe it's important to emphasize that homeownership continues to be a strong wealth-building strategy for most Americans, and these findings shouldn't be taken to mean that owning a home is not a good investment," she said.
Chicago job growth underperforms
In the Chicago region, home price growth over the past year increased 7.5% and is rising at a much faster pace than in the nation as a whole, according to Homes.com data. It's a major market and the anchor of the Midwest, but several factors limit its draw when compared to coastal communities, noted CoStar and Homes.com analysts John Gillem and Elliott Krivenko.
Job growth has trailed national trends for the better part of a decade, and incomes lag those of most coastal hubs. In Portland, Oregon, and Seattle, for example, the median household income is 10% to 30% higher. Chicago's high-paying technology sector is relatively small, and the region is one of the few large metropolitan areas with a net population loss over the past decade, according to Gillem and Krivenko.
"Over the long term, these aspects aren’t conducive to rapid single-family home price acceleration, even in a lower-supply environment," said Gillem, a director of market analytics.
The markets with the strongest inflation-adjusted price appreciation over the past 25 years are: San Jose, California, at 108.35%; Los Angeles at 69.39%; and Knoxville, Tennessee, at 55.77%, according to Johnson and Beracha.
Highly educated graduates flock to San Jose's Silicon Valley region to build careers in established or start-up tech companies, said Nigel Hughes, senior director of market analytics for CoStar and Homes.com. The average salaries and household incomes are the highest in the nation, and the region's gross domestic product has the highest growth rate over the past 10 years, with an average annual increase of 8.3%, Hughes noted.
"So, demand for housing is high, but supply is limited," Hughes said in an email. "Silicon Valley has physical constraints, lying between the coastal mountains and the San Francisco Bay. Land for new housing is in short supply, pushing up house prices to among the highest in the nation."
Johnson and Beracha, who have been studying U.S. home prices for over a decade, say their research into 100 of the largest metropolitan areas builds on the S&P CoreLogic Case-Shiller U.S. National Home Price Index and other indices. They added that they aim to help consumers make more informed real estate decisions.