A Splendid Housing Bubble

I like to read Wolf Richter's blog. Although I don't always agree with his analysis, his coverage of interest rates, real estate, and the menagerie in between is valuable. If all you consume is mainstream financial journalism from the likes of the Wall Street Journal, I highly recommend Wolf's writing, if only to challenge your priors.

Wolf has a long-running series where he covers America's second housing bubble that began gurgling in the early 2010s. Over the past couple years he has highlighted a distinct drop from peak valuations in 2021 and 2022. Since then - in the major metro areas - prices have slowly ground down. They're still at inflated valuations but the housing market has noticeably cooled. Wolf has a variety of theories for this, so I'd suggest you go get it from the horse's mouth.

Now, not all places are off-peak - relatively affordable Midwestern cities like my previous home Columbus, Ohio are still pushing new highs. However, the momentum nationwide has noticeably slowed.

All real estate is local and each market's dynamics can be different. This is best illustrated with the following chart for Ithaca, New York where line go up:

Ithaca (and Tompkins County) is unique. As the home to both Ithaca College and "Ivy League" Cornell University, it's the prototypical college town. The main economic driving force is the two higher ed institutions and the wave of students they bring to town each year. There is tourism and some industry like Borg Warner, but it's a footnote.

Housing stock in the area is infamously thin. Students competing against townies for housing push up rents to levels that no self-respecting upstate town deserves to be at. That, combined with the stratification between (relatively) well-paid white collar workers at Cornell and the mass of service workers leads to further upward pressure on home prices.

This gravy train won't last forever. A demographic cliff exists for higher ed: there are going to be fewer college students as the years progress. Eye-watering tuition costs combined with lower and lower absolute numbers of students risks upending the infinite growth hack that colleges and universities have depended on since the inception of the GI Bill.

I expect Cornell to be fine on this front. The cachet of the Ivy League will allow the university to squeeze blood from a stone - the perceived esteem of your alma mater still matters, and Cornell can always increase acceptance rates to buoy declining enrollment. Ithaca College probably won't be so lucky.

In isolation, it's a tough pill to swallow but probably not existential. Unfortunately, I foresee the weaponization of funding for higher education continuing. Specifically, I expect Federal funding cuts to be more or less permanent, regardless of the lapel pins of those in charge. To speak in metaphor, at a certain point your house is so full of mold that spritzing bleach on the walls won't save it.

The code that produced the chart above is here. You can access the Zillow ZHVI data yourself and play around.