After decades of “hollowing out,” center-cities are becoming increasingly popular, according to the Federal Housing Finance Agency. The FHFA’s latest working paper, titled “Local House Price Dynamics: New Indices and Stylized Facts” by Alexander N. Bogin, William M. Doerner, and William D. Larson, found that median home values in city centers are on the rise, likely as an offshoot of millennials preferring urban destinations to rural and suburban ones.
The working paper spans a massive 40-year dataset looking at trends between 1975 and 2015, and it found that while cities had once been the most notable victims of emigration, young, high income households are on the climb in center-cities, and prices for homes are climbing with the demand to be near central business districts and the cultural amenities cities have to offer.
There is also the appeal of cities being safer and easier to navigate than they used to be.
“While demand for housing increases at all locations in most cities due to increasing population and incomes,” the authors of the working paper stated, “center-city desirability may be increasing in … due to the broad trends of decreasing center-city crime, increasing transportation costs, and increasing amenities.
FHFA data shows steepening house prices in large cities, suggesting that demand for locations near the centers of cities is, in fact, increasing. These prices increase almost fully across the board for properties closest to central business district (CBD), but these property values are also the most volatile.
“Unconditionally, house price volatility in large cities decreases slightly with distance from the CBD,” the authors stated. “The volatility [also] results echo the appreciation results.”
The authors continued, “This is consistent with the notion that the elasticity of housing supply is higher in suburban areas. In an area with a highly elastic housing supply, a permanent housing demand shock is first capitalized into prices, but over time as quantities adjust, prices return to pre-shock levels. In contrast, near the CBD, where buildable sites are less available and regulation is presumably more onerous, a permanent demand shock can outpace supply responses, leading to permanent price increases.”
Click here to view the complete working paper.