Are the exurbs dead?

You'd think so, based on all the publicity about plummeting home prices in California – and the rapidly increasing price of gasoline. In the short run, it is probably true that we'll see big housing price drops in the exurbs and construction will stop almost completely.

The question is whether long-term California real estate prices will ever recover enough – and whether gas prices will stabilize enough – to make the exurbs competitive again. But there's another issue: whether better-located but troubled close-in suburbs can bounce back too. In many cases, they've been even harder hit.

A year ago, the average home price in the state was $450,000 and gas was around three bucks a gallon. Today, the average home price is around $330,000 – and gas is moving steadily toward five bucks a gallon. The obvious conclusion here is that if you bought an overpriced exurban home on a subprime mortgage with the intent of commuting a long way to your job, you're screwed.

And it's clear that a lot of people in this situation are screwed. Home prices have dropped more precipitously throughout inland California than in the coastal areas. DataQuick reported that prices dropped by 28-30% in May from the same month a year ago in Riverside and San Bernardino counties but by only 20-23% in the coastal counties of Los Angeles, Orange, and San Diego. Sacramento dropped by 35%, while San Francisco held almost even and Marin actually went up.

Beneath the headlines are a few subtleties. The biggest wrinkle is that it's not just the exurbs that are hurting. There are lots of places – in all kinds of locations – that have been hard-hit by the subprime crisis. It's really not about location so much as it is about demography.

In the Sacramento region, for example, the hardest-hit location has not been an exurb in some outlying county but Elk Grove, located only 15 miles to the south of job-rich downtown Sacramento. Almost 80% of recent home sales in Elk Grove have been of houses in foreclosure. Another hard-hit location has been Sacramento's Natomas area, located just over the American River from the Capitol. Both Elk Grove and Natomas are well-located in the metro area and close to jobs. But they were magnets for young renter families using teaser mortgages to get into a house.

There was another type of location that was slammed by the subprime market – older, built-out, largely poor communities. One of the biggest price drops in Los Angeles County occurred in Compton. And in San Bernardino County, according to DataQuick, the home price drop in San Bernardino city zip codes (54%) far outweighed the drop in the High Desert (around 40%). Compton is extremely well-located in relation to jobs but, of course, has a reputation, deserved or not, as poor and crime-ridden. San Bernardino is much closer to Inland Empire and even Orange County jobs than the High Desert, but suffers from a similar reputation.

So, really, the subprime mess creates two different problems for communities. The first is whether the exurbs can hang on to the ledge until the housing market comes back. And the second is whether the close-in suburbs – whether new like Elk Grove and Natomas or old like San Bernardino and Compton – will get bailed out by their locational advantage.

Let's take the exurbs first. Conventional wisdom would suggest that any California exurb will be a long-term winner. After all, there are only so many places to build. Demand is still strong. People still want single-family homes and what they perceive to be good school districts. And jobs are gradually dribbling out of the coastal areas to inland locations.

All this may be true, but it really depends on how strongly and quickly the housing market bounces back all across the states. The exurbs thrived during the '80s but suffered during the '90s when a big recession caused home prices to drop and construction to fall off. The result was not just half-built subdivisions in the exurbs, but a big move back toward the coast. Anybody who had a coastal job and could afford to move closer did so. This will surely happen again -- now that the average home price in Anaheim, for example, has dropped below $400,000.

You would think, of course, that over time an exurb would become better positioned in the metropolitan constellation as all the other "moving parts" shift. This was certainly true of the postwar suburbs such as the San Fernando Valley, the San Mateo County Peninsula, and Orange County. And it has been true of some '80s suburbs that have gone high-end, such as Pleasanton and Santa Clarita.

But the experience of the true '80s exurbs in the recent bust does not send an encouraging signal. In both the Antelope Valley and Moreno Valley – the signature '80s exurbs – home prices have dropped by more than 40% during the last year. They were exurbs 20 years ago and apparently they still are – to their detriment.

So it would seem the recovery of the exurbs will be long and slow, and it is unlikely that all those subdivisions in the High Desert and the Central Valley and the Coachella Valley will get built anytime soon (see CP&DR Local Watch, December 2007). Exurbs may not become slums, as Christopher Leinberger of the Brookings Institution has predicted, but they will be sub-par real estate performers for a long time.

In many ways, the more interesting question is what happens to the Comptons and San Bernardinos. After all, they have location on their side – and location is presumed to be an enormous advantage these days.

It's true that over the last generation, the old assumption that affluent folks will keep moving farther out and their previous housing will "filter down" to less affluent folks has been debunked in many cases. But mostly this has occurred because middle-class suburbs – if they have some locational advantage – have gone rich. This has been true of Pasadena, Santa Monica and parts of the San Fernando Valley and, again, the San Mateo County Peninsula. What hasn't happened much is the gentrification of older suburbs of modest means.

In other words, up to now, location hasn't been enough for these places to thrive. But in a world where traffic is congested and gas is five bucks a gallon, that could change. I'd say as traveling gets harder and more expensive, San Bernardino is a better bet than the High Desert, and Compton a better bet than the Antelope Valley.