The Inequality of Home Prices

New data on home sales indicate which metro areas have the narrowest gaps in housing pricesand which ones have the widest

Who hasn't driven around a city and marveled at the disparity in the sizes and prices of houses, from ordinary tract homes to palaces? The gaps seem to be bigger in some metro areas than others. Miami, for example, stands out as a city with a huge spread between the glittering precincts of Fisher Island and the vast areas of old, small, and slowly deteriorating homes.

Now, has quantified the inequality of house prices. For the first time, we've put together data for 150 metro areas showing the 99th percentile price, the median price, and the size of the gap between them. (Technical points: The median is the balancing point at which half the houses in a market are less expensive and half are more expensive. The 99th percentile is the point where 99% of the houses are less expensive and 1% are more expensive.)

Sure enough, among the biggest metro areas, the Miami-Miami Beach-Kendall (Fla.) area has the biggest ratio of the 99th percentile to the median—what we call the "inequality index." The 99th percentile house costs 6.5 times as much as the median house.

Dissecting the Spread

Perhaps more surprising is that the narrowest spread in housing prices among major metro areas is in costly Silicon Valley. In San Jose-Sunnyvale-Santa Clara, Calif., the ratio between the top and the median is only 3.4. San Jose has plenty of very expensive houses, to be sure. Its 99th percentile house is $2.5 million, even higher than Miami's $2.2 million. But its inequality ratio is lower because the median price in San Jose is so high: fully $745,000.

Don't assume that a big spread is a bad thing and a narrow spread is good. After all, middle-income families in Silicon Valley, where the inequality index is small, aren't exactly happy about the sky-high median prices there.

Housing prices, of course, have been top of mind in recent months. Softness in many markets has made homeowners nervous, and hurt the stocks of homebuilders such as D.R. Horton (DHI), Toll Brothers (TOL), Pulte Homes (PHM), and Lennar (LEN). On Jan. 25, the National Association of Realtors reported an 8.4% drop in home sales for 2006, to 6.48 million, the sharpest decline in 17 years (see, 1/25/07, "Homebuilders Hammered. Time for M&A?").

Different Demographics

The numbers on inequality in home prices were prepared at the request of by Michael Sklarz of New City Technology in Honolulu, an affiliate of Tokyo-based New City Corp. There are no figures for Texas and some other states that don't release pricing data. New City is a consultant to the firm that gathers the data from county recording offices, International Data Management, which is a subsidiary of Fidelity National Information Services. ran the new numbers past some economists and housing experts and got some interesting observations. Brian Bethune, a U.S. economist and housing specialist at Global Insight in Lexington, Mass., said the numbers probably reflect the differences in demographics between metro areas. He said San Jose's price range is so tight because there are very few homes available for low- to moderate-income homeowners. As a result, those lower-income families rent or live outside the area, keeping the median price within the area high.

By contrast, the Boston-Quincy (Mass.) area has a big gap, second only to Miami's. Why? Even though greater Boston has a reputation for being expensive, the median price is considerably lower than in San Jose: $375,000 vs. $745,000. Bethune says Boston may house a greater diversity of types of workers, including ones with more moderate incomes.

Stuck in the Middle

Miami fits that story, too. At the high end, it attracts the likes of Madonna, Sylvester Stallone, and wealthy Latin American families. Yet it has a huge pool of workers in tourism and the ports, where average pay is relatively low. Miami needs a diversity of housing stock to serve all of its residents. One other thing dragging down Miami's median is that the metro area excludes the outer suburbs that have most of the gated communities, with houses selling for $300,000 to $600,000, notes Mike Morgan, a broker in Stuart, Fla.

A high inequality index doesn't mean there's a big bulge of super-luxury homes. For proof, look at Cleveland-Elyria-Mentor, Ohio. Its 99th-percentile home, at $705,650, is actually cheaper than the median-priced home in San Jose or San Francisco. But its inequality index is high because the median price is extremely low: $140,000.

The biggest metro areas tend to be in the middle range on the inequality index: Chicago-Naperville-Joliet, Ill., is 4.9, Los Angeles County, Calif., is 4.6, and New York-White Plains, N.Y.-Wayne, N.J. is 4.5. Metro areas that big tend to have diversified workforces and populations, so they don't land on either extreme.

Click here for a slide show detailing home-price inequality for 20 metropolitan areas.

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