The Housing Market is in a Bubble in early 2021. This Bubble will deflate and eventually pop over the next year. This post is the first in a three-part series that explains why.
Each month Reventure Consulting will provide Newsletter Subscribers with the Top 25 Markets in the United States for real estate investment. This list uses a proprietary algorithm to rank metros across the country for their real estate investment desirability and potential. The data inputs for the algorithm derive from real-time economic, demographic, and real estate data for over 350 metro areas across the country.
The purpose of the Reventure Top 25 is to provide home buyers and real estate investors from across the country with data-driven insight into the top markets for investment. Because, as Reventure has explored before, picking the right market is the most important decision a real estate investor can make.
“Data-driven” is the key here. So often real estate market selection and investment decisions are made based on groupthink, gut feeling, and word of mouth. Reventure Consulting is here to change that. The Reventure Top 25 will be updated each month for Reventure Newsletter Subscribers based on hard data from reputable sources such as the Bureau of Labor Statistics, US Census Bureau, and Zillow.
The Holy Trinity of Real Estate Growth
Reventure Consulting has spent years studying, analyzing, and refining its approach to real estate market selection and investment. Through this analysis Reventure established a methodology for understanding a market’s investment potential: The Holy Trinity of Real Estate Growth.
The Holy Trinity is comprised of:
- Economic Growth
- Investment Security
- Housing Shortage
A market’s performance in each segment of the trinity determines its future level of price appreciation and rent growth, factors that will lead to higher returns for owners.
Economic Growth is the most important facet of the Trinity. Without Economic Growth, it will be very difficult for a real estate market to appreciate. By economic growth we are really focusing on two key ingredients: jobs and wages. The more a market grows jobs, the more demand there will be for housing. In addition, the more that wages increase, the more that people will be willing to spend on housing. This combination of job growth and wage growth is the magic elixir that can deliver long-term returns to home owners and real estate investors. Examples: Phoenix, Austin, Salt Lake City, Nashville
But there’s more to it than that. Markets can go on long runs of Economic Growth but still be poor real estate investments. Why? It all has to do with the price you pay – the higher the upfront price, the lower the yield, and the more risk. Meanwhile, affordable, higher-yielding markets provide Investment Security. The one thing that you can never change about a real estate investment is the price you pay for it. And the cheaper the price, especially relative to local wages and rents, the more secure the investment is. High Investment Security markets will protect you more during economic and housing downturns. Examples: Dayton, Oklahoma City, St. Louis
In addition to Economic Growth and Investment Security, we also need to consider the local housing supply situation. Quite simply, some markets- because of geography, zoning, or developer interest – fail to deliver enough new housing for its population. This situation creates a Housing Shortage, which can result in huge levels of rent growth and price appreciation. Dense coastal markets tend to experience greater Housing Shortages than more sparsely populated fly over markets. Examples: San Francisco, San Diego, Boston, Ann Arbor
The Trinity is Dynamic
A market’s aggregate performance across the Holy Trinity determines its real estate investment desirability. But it is important to note that markets often vary considerably in their performance within each segment of the trinity.
For instance, markets with high levels of Economic Growth also tend to have a lot of new home and apartment construction, which means they don’t possess a Housing Shortage. Meanwhile markets with high levels of Investment Security often have lower levels of Economic Growth, since it usually requires growth to bid prices up and lower yields in the first place.
Let’s take Austin, for example. Austin ranks in the top tier of Economic Growth markets, with super-charged job growth that provides a lot of demand for housing. But since Texas is such a building-friendly state, and because so many developers want to be in Austin, Austin is much closer to a Housing Glut than a Housing Shortage. This means that it is unlikely that Austin will achieve high long-run rates of appreciation.
Now, the Investment Security conversation with Austin is even more interesting. Back in the early to mid-2010s Austin had a high degree of Investment Security due to more affordable prices and higher yields. But now that prices in Austin have increased significantly – well above local wage growth – the market shows a lot more downside risk in 2021 than it did five years ago. This is an important point to consider: the results of the Trinity are not fixed. They change over time as dynamics in the local market shift.
So what’s the conclusion on Austin? According to the Holy Trinity Austin is a market that real estate investors should avoid right now. The combination of high prices, low yields, and significant permitting pipeline make it a risky proposition at this point in the housing cycle, even accounting for the metro’s strong Economic Growth.
Of course, things can change into future. If permitting were to decline, and prices were to correct a bit, the Trinity could view Austin as desirable for investment once again.
How to Access the Top 25
Reventure Consulting will be debuting a subscription Newsletter in June 2021 that will include monthly updates on the Top 25 Markets for Real Estate Growth and Appreciation. Moreover, the Newsletter will include research pieces, market deep dives, and interviews with real estate gurus from across the country. Check back in the next couple weeks for how to subscribe to the Newsletter. Until then, make sure to submit a contact form so you don’t miss out on any future updates!