Chad R. Wilkerson

English

Research Papers in Economics

Is Ru R a l  am e R I c a  Fa c I n g  a Ho m e  PR I c e  Bu s t ?
By Chad R. Wilkerson, Vice President and Oklahoma City Branch Executive
2008
A
fter soaring earlier this decade, U.S. housing prices 
are now falling. As of September 2008, home    
 values in the 20 large U.S. metropolitan areas 
tracked by the widely followed S&P/Case-Shiller composite 
house price index were down more than 20 percent from 
their mid-2006 peak—and are expected to fall further based 
on futures values of that index. Other national home price 
indexes reveal similarly steep recent declines.
Have home prices in rural America also been falling—
or will they fall in the future?  This article reviews trends 
in newly released home price data for non-metro areas 
of the United States. In contrast to metro home values, 
rural values have fared relatively well so far. Rural America 
was largely bypassed by the national home price boom of 
the first half of this decade and thus seems likely to avoid 
much of the correction in U.S. home prices currently 
under way. 
Rural America’s home values, however, are not risk- 
free. While not as extreme as in metro areas, rural home 
price gains in the early part of the decade clearly outpaced 
rural income gains—a likely unsustainable trend. In 
addition, since metro-area home prices began falling in 
2006, the rural economy has enjoyed a commodity price 
boom. In late 2008, however, energy and agricultural 
markets started to cool. A subsequent slowdown in rural 
economic growth could threaten home values. 
Re c e n t t R e n d s  in R u R a l  h o m e  p R i c e s
Most of the data available on home prices in the 
United States are for large metro areas, states, or the nation 
as a whole. In early 2008, however, the Office for Federal 
Housing Enterprise Oversight (OFHEO) began releasing 
periodic non-metro home price indexes for all 50 states.1  
These data provide a glimpse into how housing markets 
in rural areas have been faring during the national home 
price bust.
According to the OFHEO index, since early 2007, 
home prices in rural areas have risen slightly more than 2 
percent (Chart 1). Though small, this increase compares 
favorably with the severe decline of nearly 8 percent in 
metro-area home prices during the same period.2
Rural home prices over the past two years have also 
been remarkably resilient across the various regions of the 
country. Only rural parts of the Pacific Census region have 
experienced sizable declines since the beginning of 2007. 
Rural houses in most other regions have either held their 
value or edged upward, while prices in rural areas of the 
energy-intensive West South Central region of the country 
have continued to rise solidly.
	 	 	 	 	 	 	 	 	 								2008	•	Vol	III			Issue	VIand much of the eastern seaboard—rose faster than home 
prices in interior areas of the country. Some analysts 
attribute this trend to higher costs and greater restrictions 
on land use in coastal areas, which constrained housing 
supply even as demand for housing surged. By contrast, 
areas with plentiful open land tended to see smaller 
increases in home prices, purportedly because of greater 
ability to build another house on the edge of a city or 
beyond. Thus, space in rural areas helped the supply of 
housing keep up with rising demand. 
Analysts also now generally agree that the rapid 
increase in demand for housing earlier this decade was 
driven in large part by a sizable expansion in credit 
availability in the United States.3 Among other things, 
underwriting standards for mortgages deteriorated, 
resulting in the issuance of a large number of “no-doc” 
mortgages—in which borrower incomes were often not 
sufficiently verified. These years also witnessed an increase 
in the use of low-or zero-down-payment mortgages—often 
with low initial “teaser” interest rates that would later reset 
to a much higher rate. Often supporting these trends was 
a belief that home prices would continue to rise, allowing 
borrowers to refinance at a future date, if necessary.
The easy availability of mortgages earlier this decade 
is likely evident in a comparison of gains in home prices 
with gains in per capita incomes. Historically, home prices 
and incomes have typically tracked one another. But from 
2000 to 2005, home prices nationally rose nearly three 
times as fast as per capita incomes. In metro areas, the 
In addition, home prices in rural areas have 
outperformed home prices in metro areas in all regions 
of the country. In contrast to rural home values, metro-
area home values are down from recent peaks in nearly all 
Census regions, especially in the Pacific, South Atlantic, 
and Mountain regions.
ex p l a i n i n g  t h e  b e t t e R R u R a l  p e R f o R m a n c e
To see in general terms why rural home prices have 
not mirrored price drops in metro areas, one need only 
look at a longer history of home price trends. During the 
first half of this decade, the average annual price gains of 
homes in metro areas was nearly 10 percent, with gains 
approaching 15 percent in 2004 and 2005 (Chart 2). In 
many metro areas during the period, home price gains 
were considerably higher. By contrast, home price gains in 
rural parts of the country stayed largely in line with recent 
historical averages through 2003, before rising somewhat 
more rapidly from mid-2004 to mid-2006.
Since rural areas experienced much less of the home 
price boom of the first half of this decade, it stands to reason 
that now they are experiencing less of a bust. But why did 
home prices increase less in rural areas than in metro areas 
during the boom years?  Two potential reasons stand out—
greater availability of rural land and, perhaps, somewhat 
better credit underwriting standards by rural lenders.
In general, from 2000 to 2005, home prices in many 
coastal states and metros—including Florida, California, 
page 2
ch a R t  2
u.s. ho m e  pR i c e  ga i n s , 1996-2008
ch a R t  1
cu m u l a t i v e  ho m e  pR i c e  ch a n g e  b y ce n s u s  
Re g i o n , 1s t Qu a R t e R , 2007—3R d Qu a R t e R , 2008
10
5
0
-5
Metro -10
-15
-20
10
5
0
-5
-10
-15
-20
United
States
West 
South
Central
East 
South
Central
West 
North
Central
Mountain Mid-
Atlantic
South
Atlantic
East 
North
Central
New
England
Paciﬁc
Percent
Non-Metro
Source:  OFHEO
Source:  OFHEO
-10
-5
0
5
10
15
20
-10
-5
0
5
10
15
20
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Metro
Non-Metro
Percent Change from Year Agolo o k i n g  a h e a d
So are rural areas likely to follow metro areas into a 
home price freefall?  With more reasonable ratios of home 
price gains to income gains in rural areas than in metro areas 
earlier this decade, coupled with more moderate rises in home 
prices, a severe drop in rural home values seems unlikely. 
Further supporting this expectation are recent trends in 
the issuance of single-family housing permits in rural areas. 
Since the difficulties in the nation’s housing sector emerged 
in 2006, plans for construction of new homes have dropped 
sharply in both the nation’s cities and rural areas (Chart 3). 
However, rural areas made more sizable initial reductions 
in homebuilding than metros, and in 2008 rural areas 
cut residential construction even more dramatically. This 
sharper reduction in rural building activity should help keep 
inventories of unsold homes more in check, thus providing 
some support for rural prices.
Still, risks to rural home prices remain, due to both past 
excesses and future economic uncertainty. As in metro areas, 
home prices in many rural areas outstripped income gains 
by considerable amounts from 2000 to 2005. Indeed, home 
values increased at least 50 percent more than per capita 
ratio of gains in home prices to per capita income was 
even higher, at 3.2 to 1. 
By contrast, during the same period, home prices 
in rural areas rose less than twice as fast as incomes, at a 
ratio of 1.8 to 1. Similar trends held true across all Census 
regions, with the ratio of gains in home prices to per capita 
income greater in metro areas than in non-metro areas 
(Map 1). This difference suggests that home prices may 
have been more out of line with “fundamentals” in metro 
areas. It further suggests that mortgage underwriting 
standards could potentially have been tighter in rural areas, 
although actual data on mortgage underwriting in rural 
areas are very limited.
Even so, home price gains in both metro and non-
metro areas clearly exceeded income growth by wide 
margins in the first half of this decade. This trend departed 
sharply from the previous five-year period. From 1995 to 
2000, home prices and incomes rose at about the same 
rate in both metro and rural areas of the country. Indeed, 
during that period, nowhere in the country—neither in 
metro nor rural areas—did home price gains exceed per 
capita income growth by more than 20 percent.
page 3
ma p 1
Ra t i o  o f  ho m e  pR i c e  in c R e a s e  t o  pe R ca p i t a  
in c o m e  gR o w t h , 2000 t o  2005
Pacific
Mountain
West South Central
West North Central East 
North Central
East
South
Central
South Atlantic
New England
Middle 
Atlantic
Metro: 4.6 
Rural: 3.1
Metro:  2.1
Rural: 1.7
Metro: 1.9
Rural: 1.5
Metro: 2.3
Rural: 1.5
Metro: 1.4
Rural: 1.2
Metro: 3.2 
Rural: 2.2
Metro: 3.6
Rural: 2.3
Metro:  3.6
Rural: 3.1
Metro: 1.3
Rural: 1.2
Source: OFHEO, Bureau of Economic Analysispage 4
incomes in rural areas of all Census regions except the West 
South Central and East South Central. Some unwinding of 
this trend seems likely heading forward.
Furthermore, during much of the time that metro 
home prices have been falling, the economies of many 
rural areas of the country have been boosted by strong 
activity in the energy and agriculture industries, driven by 
a boom in commodity prices. Indeed, while job growth in 
the nation’s metro areas slowed dramatically from the third 
quarter of 2007 to the third quarter of 2008, in rural areas, 
employment gains largely continued (Chart 4).
Commodity prices have come down since mid-2008, 
however, increasing economic uncertainty for rural areas 
that depend on energy and agriculture. Should these rural 
economies begin to experience job and income losses, their 
housing markets could also come under more pressure.
co n c l u s i o n s
So far, unlike metro areas, housing markets in 
rural areas of the country have suffered only a glancing 
blow from declining home values. This resilience can 
be explained largely by better fundamentals in home 
prices in rural areas in recent years. In particular, gains 
in housing values were less out of line with income 
growth than in metro areas. In addition, since the 
outbreak of the nation’s housing difficulties, new home 
construction has slowed more sharply in rural areas 
than in metro areas, a trend that should help prevent a 
glut of unsold rural houses.
As such, any future home price declines in rural 
America are likely to be much less severe than in 
cities. Still, rural home values are unlikely to rise 
appreciably in the years ahead. Though not as extreme 
as in metro areas, rural home prices outpaced per 
capita incomes by a sizable margin earlier this decade, 
a trend that may need to unwind somewhat. Finally, 
with commodity prices falling sharply in late 2008, 
many rural economies are bracing for slower economic 
growth heading forward—and, in turn, softer demand 
for housing.
ch a R t  3
si n g l e -fa m i l y  ho u s i n g  pe R m i t s  is s u e d
ch a R t  4
em p l o y m e n t  gR o w t h
-50
-40
-30
-20
-10
0
10
-50
-40
-30
-20
-10
0
10
Metro U.S. Rural U.S.
Q3 2007
Q3 2008
Percent Change from Year Ago
Source: Census Bureau
Source: Bureau of Labor Statistics
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Metro U.S. Rural U.S.
Q3 2007
Q3 2008
Percent Change from Year Ago
en d n o t e s
1  In July 2008, the OFHEO officially became part of the 
Federal Housing Finance Authority (FHFA).
2  For an analysis of differing methodologies of national 
home price indexes, see Rappaport (2007), “A Guide 
to Aggregate House Price Measures,” Federal Reserve 
Bank of Kansas City Economic Review, Second Quarter.  
OFHEO does not construct national or regional rural 
home price indexes.  Such indexes were constructed for 
this article by weighting the individual state metro and 
rural indexes by the number of metro and rural owner-
occupied homes in each state in 2000, the same method 
as used by OFHEO to construct its overall national home 
price index.  
3  See, for example, Davis et al (2007), “What’s Really 
Going on in Housing Markets?” Federal Reserve Bank of 
Cleveland Economic Trends, July, and Edmiston (2007), 
“Rising Foreclosures in the United States:  A Perfect 
Storm,” Federal Reserve Bank of Kansas City Economic 
Review, Fourth Quarter.

Is rural America facing a home price bust?

http://www.kansascityfed.org/Publicat/mse/MSE_1208.pdf

Is rural America facing a home price bust?

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