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Conditions Are Ripe for a Big-City Exodus

High housing prices may drive Americans in from the coasts.
Location, location, location.

Location, location, location.

Photographer: Spencer Platt/Getty Images

The stock market of the late 1990s is remembered mostly for high-flying dotcom equities that eventually crashed back to earth. Yet from a money flows standpoint, the bigger imbalance of that era was that large-cap stocks fetched very high valuations relative to small-cap stocks. This market opportunity was exploited by hedge funds, leading to a decade of outperformance and huge growth in the industry. In many ways, the national housing market is similarly positioned today.

Trulia article this week showed that home values in the most expensive U.S. metro areas have diverged sharply from those in the rest of the country over the past 30 years. Not only have incomes grown the fastest in West Coast cities such as San Francisco, San Jose and Seattle, but natural and political constraints have made it difficult to increase housing supply, leading to even faster home price growth. At the other end of the spectrum, in the South and the Midwest, lower income growth combined with fewer constraints on increasing the housing supply has led to more muted home price gains.