Ghost Towns: Housing collapse will result in new types of 'declining cities'

U.S. metropolitan areas which have suffered the steepest drops in housing prices are poised to endure long-term deterioration similar to how certain cities in the Rust Belt were permanently damaged by the decline of manufacturing.

According to a new report published by the Research Institute for Housing America, a division of the Mortgage Bankers Association, a new kind of declining city will emerge in the U.S. that will witness neighborhoods with high rates of vacancies and a sustained drop in population.

Indeed, certain urban and suburban areas in California, Nevada and Arizona will become like the fading old post-industrial cities in the East like Cleveland, Buffalo and Detroit.

Some neighborhoods are going to suffer tremendously or are never going to come back or come back very, very slowly, said James R. Follain, senior fellow at the Rockefeller Institute of Government and author of the study.

The study identified various potential areas which are at greatest risk of enduring years of decline, including Stockton, Modesto, Fresno, Riverside and San Bernardino in California, Las Vegas, Nevada and Miami, Fla. These areas saw a housing boom that led to overbuilding – now their landscapes will be scarred for decades with empty homes, office buildings and storefronts.

The report defines a “declining city” as one in which “the people have left, but the houses, apartment buildings, offices and storefronts remain. At the extreme, think of a ghost town from the Old West, a town that lost its reason for being.”

Thus, while the decline of manufacturing on the East Coast over the past three or four decades have created “Rust Belt” cities, the decline in home prices will create cities in long-term decline in the Sun Belt (areas vastly different from dismal eastern cities like Cleveland and Detroit).

“There are certainly neighborhoods and submarkets within metro areas that have passed a tipping point, and have little prospect of returning to anything close to their previous peaks,” the study noted.

“Another type of declining city may also be emerging — places that grew substantially during the housing boom and are now experiencing unprecedented declines in house prices and increases in foreclosures.”

The report especially focuses on Stockton, California, which is a particularly striking case of a city that at first flourished then collapsed as a result of the housing boom and bust.

“Stockton… had been among the fastest growing areas in the United States until the Great Recession and now it is among those areas particularly hard-hit by the crisis,” the study noted.

Indeed, the median house price in Stockton grew by 230 percent from 1980 to 2006, but is now just nine percent higher today than it was in 1980 and about equal to the median house price in Detroit, the study noted. Otherwise, Stockton and Detroit share little else in common.

Between 2006-2009, housing prices are estimated to have plunged 75 percent in Stockton.

Many more Stocktons will likely dot the U.S. map in the years to come.