A few listeners brought up the issue of housing prices in Grand Forks, which as we all know is just my favorite topic. I thought that it would be important to discuss again for a few reasons. (This is likely a longer post, you might want to get out now.)
The topic came up in part because of my recent post about the lack of employment change in Grand Forks over the last ten years, and while I was not talking about it directly I think housing prices are a closely related topic. Actually when you talk about employment in a local economy it has the potential to impact almost any other area of the economy.
The way I see it there are several factors playing into housing prices in the Grand Forks area, some easy to quantify and some not.
- Home appraisal and pricing is a bit of art and science and contains a significant amount of guesswork.
- Employment dynamics in the state and region became complicated due to the oil boom.
- The age profile for the state has been getting older and that is changing the in-state migration patterns.
First, here is a picture of the price changes for the three metropolitan statistical areas in North Dakota. This is the year-over-year percentage change of the Federal Housing Finance Agency price index as a quick correction for seasonality (data available here). The price growth since 2010 in all three markets is amazing, and remains above zero even with slower oil activity. The good news here is that the perception of high prices does seem to conform to reality.
Home Appraisal Process
Anybody that purchased a house, or refinanced their mortgage, can likely give you an interesting story about the appraisal process. There are sketches made of the home, inquiries about the purchase date of appliances, measurements of rooms, all the appearances of a scientific process. Then comes the art. You need to find comparable recent sales in an area, but you have a fireplace and the other house does not. We need to make an adjustment for that, but how much exactly? Your house is around the block from a school, park, dogsled track, or whatever. We need to make an adjustment for that too. There are standards out there for the valuation adjustments but do they really change the amount people are willing to pay for a home?
The answer at some level is yes because it changes what the realtor tells you to ask for the house. Certainly people have budget constraints when buying a home, as well as a target price for sure, but there is often some flexibility when the house price differs from the target. It is even more the case when all prices in a market cluster together. (The statistical aspects of clustering of prices will not be dealt with here.) Many callers express frustration at the level of prices and the lack of availability of homes at any level of prices, but as I pointed out in the past, these callers often talk about wanting a home in a particular part of town or with a particular feature. As a result, they reduce the supply of homes they are willing to consider.
We know well the complicated dynamic of employment in the state. The oil boom changed the locus of economic activity from South and East to North and West. We had people relocate within the state in a reversal of the flows of the previous decades. In addition, the new people entering the state looked to find employment in the West. The result was employment shortages across the state. Such shortages tend to raise the price of labor as employers take a long look at the marginal value of the next worker and pay them accordingly.
An added issue was the fact that oil jobs had high salaries, again due to the marginal product of the workers. This factor forced other industries to increase compensation as well to either attract or retain workforce. Higher incomes allow people to bid more for housing, as well as many other goods too. These adjustments take time, and the fact that oil acted like a constant shock to the economy did not really give employers time to respond. I’ve talked about this on the radio and in other posts many times so I am not going to go into the same story here.
An issue relatively unexplored in the state so far has to do with the economic adjustments due to the changing geography of age. What do I mean by this? Consider the data from the Census Bureau’s American Community Survey (5-year estimates) for each of the three mentioned cities and the state of North Dakota as a whole.
From 2011 to 2013 the population in North Dakota aged 65 and over increased by 2.5%. For Bismarck the increase was 7.08%, for Fargo it was 9.36%, and for Grand Forks it was 5.68%. Each of these three cities saw the population aged 65 and over at least double or triple. These changes are also larger than the increase of the overall population in each city. This is a sizable difference in just a few years. (I’ll delve into the dynamics of movement within the state and natural aging of the cities in a later post). As the older residents move into the cities their preferences start to influence the price, location, and quantity of homes. Essentially you see new people start to enter as buyers, and more buyers bids up the price. Even if they are bidding up the prices of one type of housing (say there is a preference for single level living, proximity to the Senior Citizens Center or a health care facility) this has impacts on the other buyers and the available supplies of housing.
So once again we get to the point where I say the natural functions and outcomes of markets explain the events occurring in the Grand Forks housing market. There are other issues we did not bring into the discussion such as the constraints individuals place on themselves (needing a house with a fence, or near a particular school, and so on) and how that limits the supply of available housing in their calculation.
Once again though, those who do not like the outcomes of the market process get to continue to ignore me and insist that there is some flaw or rigged aspect to the local housing markets and I will continue to point out the errors in their thinking about the housing markets.