Back in April 2011, I asked, "Will this year finally mark the recovery of the housing market?" Obviously, with the clarity of hindsight, it wasn't. And this year has only been slightly better.  At the time, I made the following arguments for the housing recovery:

  • The relationship between house prices and incomes was then, and still is, at the lowest level in 35 years. Nationally, the cost of a house was the equivalent of about 19 months of total pay for an average family, and that ratio has improved even further in 2012. Historically, prices usually average close to two years of pay, although that varies around the country.
  • In certain formerly frothy housing markets, the compression in values has even been more marked. A home in Los Angeles cost the equivalent of 4.5 years of pay, but the average price has since fallen to just over two years then, and slightly under two years now. That is well below its pre-bubble average of 2.6 years, which means average Los Angeles homes are cheaper in real terms than they were typically from 1989 through 2003.
  • Another positive sign the market was nearing a trough is the inevitable indicator of a bottom. Investors had started to buy up houses and condos, in some instances paying entirely in cash, and that trend has accelerated in 2012. Inventories in some of the most overbuilt markets like Phoenix and Miami were shrinking rapidly, and have fallen to new post-bubble lows this year.

So I was right about all of the above, and more than a year after writing these views, the housing recovery is still painfully slow and is having a very difficult time gaining any traction.

Dots on a map
For months I have been refining my thoughts about the recovery, and speculating that the recovery will be neighborhood by neighborhood, town by town, county by county, and state by state. I am convinced that if we look at a housing recovery map of the entire country a year or two from now, we will see thousands of small green dots, or areas where housing has turned around, and both selling prices and inventories will be improving.

There will be some yellow dots, or areas  that have stabilized, with no further deterioration in selling price or growths in inventory, but not much improvement either. Finally, the map will have a few red dots, marking those areas where the housing remains moribund, possibly stuck at a bottom and maybe even witnessing further small drops in values and no appreciable inventory absorption.

I use the term "area" in defining this future map of green, yellow, and red dots. That's because I was apparently too optimistic that the recovery would come neighborhood by neighborhood and town by town.  In a report just published by Zillow, it appears that markets are exiting the downturn at different speeds, and that the old adage, "location, location, location" is more true today than ever. The report finds that the recovery is even more micro-geographic than anyone expected, with upturns literally occurring on a street-by-street basis.  This uneven performance is in stark contrast to the fact that property markets across the country rose together during the housing boom and fell together during the crash.

That fitful recovery is reflected in the Zillow analysis. Homes in sought-after neighborhoods are finding buyers. But others in neighborhoods just a few miles away, including so-called exurbs or areas that never fully gentrified, are languishing.

Uneven recovery
Zillow tracked price changes by zip codes for dozens of metropolitan areas in April compared with three months earlier. The company uses a proprietary model, considering factors such as sales and appraisals to determine the value of all homes in an area. The data paint a picture of an uneven housing recovery that is lifting some neighborhoods while bypassing others just a few blocks or miles away.

The data reflect a broad recovery in a handful of markets. Nearly 94% of Phoenix zip codes and 90% of those in Denver saw values rise during the three-month period ending in April, up from 5% and 6% a year ago, respectively. But a few are getting worse. Just 6% of zip codes in Albany, N.Y., posted gains in April, down from 28% one year ago.

Many fall somewhere in between. In Seattle, home values rose in more than one-third of zip codes. While that is a sharp improvement from a year ago when just 3% saw values rise, continued declines in the rest of the region have left overall values below their year-earlier levels.

More housing markets are reporting a boost in sales compared with last spring, even as the number of homes for sale has dropped in many markets. In Seattle, listings at the end of May were down 43% from a year ago, largely because of banks slowing down foreclosures and sellers keeping their properties off the market rather than accepting big losses.

The result is that prices are beginning to rise, but not in every neighborhood. There's a flight to neighborhoods with high-quality schools, low crime rates, and attractive houses which have become more affordable, which is driving demand. During the housing boom, some Americans took on longer commutes to afford the dream of homeownership. The fastest-growing communities in the U.S. were areas such as Loudon County, a Virginia suburb 25 miles from Washington, D.C.; Kendall County, Ill., 40 miles from Chicago; and Rockwall County, Texas, 30 miles from Dallas.

These marginal neighborhoods are not expected to do well until the more desirable neighborhoods are completely absorbed. Many of those communities also face the brunt of potential foreclosures from the indeterminate shadow inventory of homes that haven't yet been taken back and resold by banks.

Desirable communities
So what is the profile of these micro-geographies? As a starting point, desirable communities where people always want to live have done well. This includes neighborhoods that are the closest to the city center, with low crime rates, attractive housing stock, accessibility to major job centers, and good schools.

Also, attractively priced homes are a big draw. Just because homes are in a choice neighborhood doesn't mean they are selling. Many are not selling if they are perceived to be overpriced, and some high-end neighborhoods are still seeing sellers test the market at unrealistic prices, according to the Zillow report.

Unfortunately, we are starting to witness a profile of those micro-geographies that will be a long time coming back, and for that matter, may never reach their previous high water marks.  These include the far-flung exurbs on the outskirts of towns all over the country, which attracted more entry-level, sub-prime borrowers, or neighborhoods that tried to gentrify during the bubble but didn't quite make it.

They are now challenged by the formerly out-of-reach communities that have come down in value and are now more financially accessible. When the shadow inventory of foreclosed properties that haven't yet been taken back by banks does materialize, it is likely to be focused on many of these communities while bypassing the more established parts of town that saw less dramatic housing bubbles.

The other laggards include townhouses and condominiums. These were often an attractive entry point for homeowners who otherwise wouldn't have been able to afford single-family homes in the same areas. But now that prices have corrected, buyers aren't interested in these properties if they can get a single-family home at the same price point, which is now happening. Townhouses and condominiums are considered the inventory of last resort.

As the slow housing recovery takes hold, watch for the micro-geographies that will lead the industry out of this prolonged housing recession.

Pierre Villere is president and managing partner of Allen-Villere Partners. E-mail pvillere@allenvillere.com or telephone 985-727-4310. Visit www.allenvillere.com.