EcoDemo Analysis, Market Analysis

Best Value Cities in the 2021 Real Estate Bubble

Home prices are way up. Jobs and wages are stagnant. This combination is putting significant stress on the US Housing Market. Families are being priced out of homeownership, often by out of town investors and cash buyers. The combination of these factors is making the 2021 Housing Bubble look eerily similar to a time in the not so distant past…

…Back in 2005 the state of the real estate market looked very similar to today. Jaw-dropping, double-digit annual price increases. Record low inventory. Tons of investor demand. Many pundits and headlines claiming that growth was legitimate because of housing shortages and demographic shifts.

Of course, we all know what happened soon after. The US Housing Market cratered, losing 25% of its value in aggregate from 2007 to 2012. Some cities even witnessed shocking 50% declines! But…other cities were spared, experiencing modest declines of 5-10% in value. Others actually GAINED value during the worst national housing crash in US history.

How did the 2007-12 Housing Crash have such an unequal impact on cities across the country? And what can we learn from these differences about the cities home buyers and real estate investors should be TARGETING and AVOIDING in the 2021 Bubble? Read below to find out!

Housing Bust v. Midwest Rust

The sheer difference in how housing markets across the US reacted to the last bust is astounding. While the US average price went down by 25%, losses were double that in many southwest markets. Meanwhile, some cities in the Midwest Rust Belt barely registered a blip.

Cities like Phoenix and Orlando had 50% price declines from 2007-12. Yet Pittsburgh and Buffalo grew prices. (Source: Zillow ZHVI)

The worst-hit market was Las Vegas. The typical price of a home in the Sin City fell from $357k in 2007 all the way down to $135k in 2012, a ridiculous 63% decline. Nearby Phoenix also had a tough go of it, registering a 53% drop.

Other markets that experienced difficulties were the Florida Big 4: Miami, Tampa, Orlando, and Jacksonville. California also took it on the chin, particularly Riverside, Los Angeles, San Diego, and San Francisco.

But now turn your attention to the upper left portion of the graph. The bars in blue/grey. These cities were much better off. In fact, Pittsburgh and Buffalo actually registered price increases during this tumultuous span.

Wait…Pittsburgh and Buffalo? Those old, low-growth, Rust Belt cities did the best during the last housing crash? How is that possible?

Home Prices Go Up; Home Prices Go Down

It wasn’t just Pittsburgh and Buffalo. The likes of Syracuse, Rochester, Harrisburg, and Scranton also weathered the storm remarkably well, each retaining their value. Imagine that: This list of unremarkable Rust Belt cities, a who’s who of low-growth and aging metropolis’, outperformed everyone else during worst housing crash in US history.

This warrants a pause. And some reflection. Most of the mainstream narrative surrounding the desirability of a housing market focuses on economic growth. The story goes that cities with new jobs and business relocations are the most desirable.

And this narrative is correct – that is, correct during an economic expansion. When the economy and housing market are going well, it’s the high growth cities that will experience the most appreciation. The Phoenix, Las Vegas, and Orlando contingent discussed above.

But what the mainstream narrative fails to consider is what happens when the economy and housing market struggle. As it turns out, all of the built up momentum experienced by growth markets during the good times heads in the opposite direction during the bad.

Huge appreciation turns into huge declines. The associated job growth the economy experienced from an up real estate market turns into job losses. And so a vicious circle is born which makes the high growth markets the ones that get hit the hardest in a downturn.

This reality is reflected in the graph below, which compares the price appreciation markets experienced from 2001-07 with the associated price declines from 2007-12. The relationship between the two is striking.

Home Price Appreciation from 2001-07 was extremely predicting of subsequent price declines from 2007-12. (Source: Zillow ZHVI)

The blue box markets – in the top left – weathered the last housing crisis fairly well. And basically all of them had relatively low levels of appreciation leading up to the crash.

The reverse is true for the yellow box markets in the bottom right. These were the cities that had a real housing crisis the last time around. And wouldn’t you know – they all had huge appreciation leading up to the crash.

Real Estate: a Speculative Investment

It doesn’t seem like the explanation should be this simple…that surging appreciation, on its own, explains the severity of the subsequent crash. But things make more sense when you consider the type of investment that real estate has become in America over the last 20 years: an extremely speculative one.

The US Housing Market used to be stable. For nearly all of the 20th century home prices and inflation matched each other 1-for-1. Housing was not an asset that appreciated by much. Nor did it decline by much. It was steady.

But things changed around 2000, thanks to a combination of factors including loose Federal Reserve policy, government support for home ownership expansion, and the popularization of house flipping. The result is that real estate shifted from a safe, boring asset into into a speculative casino.

This type of casino gambling occurs more in some markets than others. For instance, investor demand for homes in markets like Las Vegas is much higher than Buffalo. The result is that investors pile into Las Vegas in an expansion, pushing prices up higher. However, when the downturn occurs, the investors move to take their profits and sell, pushing prices lower.

To think about it another way: a market like Buffalo has a higher share of owners that actually live in the home, meaning that even if the local housing market declines, housing inventory won’t increase by much. After all – true home owners place a higher priority on enjoying the use of their home than capturing the most profit possible.

Another factor to consider is velocity of home sales. High growth markets, with lots of investors and people moving in/out, will experience more buying and selling of homes. This higher sales velocity naturally pushes prices up during a housing boom because of the realtor fees and closing costs that get charged with each sale. For instance, if someone buys a home in Phoenix in 2020 but sells it in 2021, they need to increase the sales price by 6-7% just to cover the closing costs of their original purchase.

Of course, this sales velocity-driven increase in prices isn’t reflective of the fundamental value in the market. And when the downturn comes, prices will fall harder.

Establishing a Model for Market Security

The markets that home buyers and investors should be targeting in the late stages of a real estate cycle, as the US is in right now, are the boring ones. The low growth and appreciation markets. The ones that you don’t read about in the headlines. How do you discover these markets? By using three Key Criteria.

Low Appreciation: that’s right. In 2021 you want to be targeting low appreciation markets for your home buying and real estate investing. That’s because these markets are likely to withstand the upcoming downturn much better than the high-flying markets that you read about in the headlines. Baltimore, Virginia Beach, and Oklahoma City (yellow bars below) don’t sound like sexy markets – but they are likely to weather the upcoming storm better than others.

Austin, Denver, and Nashville had low appreciation before last crash but strong during the current bubble. (Source: Zillow ZHVI)

Seattle, Salt Lake, Tampa, and Phoenix (in blue) are near the top of the appreciation tables once again. Meanwhile, Austin, Denver, Dallas, and Nashville, which were low appreciation markets from 2001-07, have vaulted into the high appreciation category.

Buffalo, a low-appreciation standout from the the previous crash, is now bordering on high appreciation, measuring +50% growth over the last six years. Other rust belt markets like Dayton, Cincinnati, and Youngstown have also increased appreciation substantially, making them less secure in 2021 than they were in the previous bubble.

Increasing Wages: Local wages are the fundamental, long-term driver of home prices. The more money that people make, the more they will be able to spend on housing. As a result, markets experiencing wage growth will likely have more support for more fundamental housing demand when the bubble bursts. That is – when inventory inevitably increases, the local renter population will be able to step in and purchase that inventory. Especially when that market has already low levels of appreciation.

Markets that combine low levels of appreciation with high wage growth over the last half-decade include:

  • Albany, NY
  • Rochester, NY
  • Omaha, NE
  • Birmingham, AL
  • Oklahoma City, OK
  • Peoria, IL
  • Shreveport, LA

You might notice some familiar faces from this list. Markets like Rochester, Omaha, and Oklahoma City were some of the best-performing markets in the previous crash.

Economic Stability: Using the low appreciation investment model will exclude many of America’s top job growth markets from your search. Cities like Austin, Boise, and Salt Lake are top of the table in job growth, and for that reason, investors pile in and bid up prices. So forget getting into a growth city with this strategy. However, even if we can’t have economic growth, we want to at least have stability.

Aforementioned markets like Shreveport, LA and Peoria, IL lack this stability. Both markets have lost 10% of their job count over the last five years. As a result, there is a high risk of foreclosures and evictions once the federal moratoriums end. Home buyers and investors probably want to avoid buying in markets like this.

Focusing on cities that have at least maintained job levels, or suffered only modest reductions, will provide additional downside protection.

Best Cities for Real Estate in the 2021 Bubble

Home buyers and real estate investors who are intent on buying in the mania-driven 2021 bubble should seek low prices, growing wages, and a stable economy. The markets that fulfill these criteria will provide more downside protection for when the Housing Bubble eventually does burst. These markets – the Buffalo’s and Omaha’s of the world – might not be the sexiest markets at first glance. But that’s a good thing – that’s what allowed them to weather the last housing crash.

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