Where To Invest In Real Estate In 2019
Halfway through the year real estate markets across the country hold different potential for investors, and favor different investment strategies.
Some markets are over-priced—are they bubbles waiting to burst? Some boast strong demand, reflected in high home price increases—will they soon become over-priced? Some currently see moderate demand but have good economic growth—how will that growth affect future prices? And some are enduring mediocre growth and modest demand—how do you invest in a stagnant market?
All real estate markets are local, but they're still affected by the national economy. So, first a word about that. Despite much talk about how well the U.S. economy is doing, the aspect that matters most to real estate—jobs—has been slowing down. In recent months the national rate of job growth was 1.5%, the lowest in years.
Jobs directly drive demand for single-family homes and for rentals. They also drive consumer spending, the backbone of the economy. Slower consumer spending can produce a business slowdown that will affect all real estate markets.
Markets become over-priced when home prices rise faster than local income. I estimate how much a market is over-priced using a metric I developed over 25 years ago at Local Market Monitor which compares actual prices with a local 'income' price. We've seen that if local prices are more than 20% or so above the 'income' price, the risk that home prices will eventually fall is much higher than usual.
The most over-priced market right now is Miami, at 45%, followed by Tampa, Denver, Boise, Austin, North Port-Bradenton, Salt Lake City, Phoenix, and the greater Los Angeles area. At 25% we find Houston, Seattle, San Francisco, Orlando, Charleston.
Because the population of Miami has grown only modestly in recent years, the high home prices are probably due to foreign buyers, an unstable source of demand. The local economy is still doing well and home prices were up 7% in the past year—that's difficult to walk away from. There may be a soft landing, but I'd be tempted to sell while the going is still good.
Boise is another problem market, but for the opposite reason. Economic growth and population growth have both been very high. Home builders haven't been able to keep up, so home prices soared 40% in the last three years, 16% alone in 2018. By California standards they're still ridiculously low, so I expect this boom to continue for a while, but not forever. The wild card is the large presence of high-tech companies and especially Micron, who could be victims (or beneficiaries, depending on how it goes) of any protracted trade war with China.
Denver is also a market where home prices soared because of the growth of high-tech, but the cycle is further along than in Boise. Job growth slowed to a very modest level in the past year and even though prices were still up 7%, this is less than the big increases of prior years. A bust is less likely than in Miami, but prices seem very close to peaking.
A bust also isn't likely in Greater Los Angeles where home prices were up moderately in the past year. But the population is stagnant and the current poor growth in jobs points to an extended period of price instability.
The big question in both Seattle and San Francisco is whether the large spike in home prices in the last few years will end in a soft landing or an outright bust. Prices were up 5% in Seattle last year, 4% in San Francisco, compared to recent jumps of 15% and 13%. Economic growth remains good, but prices clearly will peak in the next year or so. This is the national economy comes into play because spending on high-tech—the economic driver of both markets—will take a big hit if the U.S. economy hits a slowdown.
Markets with Strong Demand for Real Estate
These markets had the largest increase in home prices in the past year. Some of them may soon be over-priced, but right now they're hot-spots of demand, with prices up 8% to 13% in the past year. These markets include Las Vegas, Ogden, Colorado Springs, Charlotte, Raleigh, Grand Rapids, Jacksonville, Nashville, Tucson, Indianapolis and Atlanta.
Las Vegas is the trickiest of the bunch, with prices up 13% last year. That's bubble territory, but population growth and job growth have also been high. The demand is real and should keep the ball rolling a few more years.
Aside from Vegas, the strongest economies in this group are Ogden, Nashville, Charlotte, Atlanta and Colorado Springs. The weaker economies, where job growth is below the national average, are Indianapolis, Jacksonville, Raleigh and Grand Rapids.
Strong demand for real estate can weather poor economic growth for a while, it's people that matter. And the population in all of these markets has grown smartly. But it can't continue for long if not enough new jobs are created. Stay tuned.
Markets with Good Growth and Moderate Demand
These come in two varieties: formerly hot markets that seem to be coming in for a soft landing; Dallas, Cape Coral, Sacramento, San Jose, Portland Oregon.
And markets on the rise after years of weakness; Fresno, Philadelphia, Winston-Salem, Cincinnati.
The formerly hot markets were never so hot that they became over-priced. This means their home prices probably will go sideways for a while but they won't fall, as long as the economy remains in good shape.
In the markets on the rise, home prices will probably increase around 6% a year for a while, but growth isn't yet strong enough to jack demand above supply.
Markets with Modest Prospects
Detroit, New York, Chicago, Washington DC, Minneapolis, St. Louis, Pittsburgh, Cleveland, Boston.
The problem for all these markets is that economic growth is slow, and has been for a while. And, with the exception of Washington and Minneapolis, the population isn't increasing. In such a situation, higher demand can only come from segments within the market at the expense of others, a zero-sum game.
How Best to Invest in These Markets
You can make a good investment in almost any market, but your chances of success are better if you fit your strategy to the local conditions.
In markets with modest prospects, you can take your time to find a property. Price and rents must give you a good return immediately; you can't bet on things improving. Rehabbing a property into a higher rental range works well as long as you know you'll find renters there. The right rental range changes from zip code to zip code.
In markets with moderate demand, you can be more aggressive if they're on the up-swing, you can still find bargains. Some locations in up-swing markets will do extremely well in the future, do your homework to find them.
In those markets coming in for a soft landing you'll be buying at record prices but you can't count on higher prices in the future. So you should look for properties that can be divided into rental units. That will take extra time and money and you must be careful to rent into the right range.
In markets with strong demand, you have to move quickly and will probably have to divide into rental units because prices are already higher than rents. Upgrading to a higher rent range can also work well but stay away from the high end, which will be vulnerable if the market cools. Flipping properties is still a good option, but keep an eye on the economy.
In over-priced markets, the temptation to go after high-end renters is very strong, but you should resist it because that will be the worst part of the market once the boom is over—maybe very soon. You'll do better with mid-range renters, there are more of them. Your strategy must be for the long-run, don't expect to cash out anytime soon.
With one eye on an iffy national economy, investors still have lots of opportunities in these different types of markets. Match your strategy to the circumstances and protect yourself by investing into the right rental range.