Surging Construction Costs in 2021 are being blamed for the Housing Market Mania being experienced in the US. Yet the data tells a very different story.
Republicans or Democrats – which party is better for real estate growth?
Home buyers and real estate investors have a lot things to think about these days. Things like “what can I afford”, “what area do I want to be in”, and “where is the growth occurring”. If you’ve ever went through the home-buying or real estate acquisition process, you’ve no doubt asked yourself these questions.
But there’s another, increasingly important question that deserves your consideration these days: “What are the local politics like?” AKA, is the area I’m moving into Republican/Conservative or Democrat/Liberal? The answer to this question will have a large impact on the growth and security of your real estate investment.
Red State Dominance; Red State Resilience
Let’s start by looking at a fundamental pillar of real estate appreciation: economic growth. If an area is growing its economy, its real estate market will benefit, with more people and incomes competing over homes and apartments. For the much of the last two decades Red States – those that averaged a 10%+ voting margin for the Republican presidential candidate from 2008 to 2020 – have dominated the economic growth charts.
Red States grew jobs at an impressive +14.5% from 2005 to 2019, propelled forward by the likes of Texas, Utah, South Carolina, and Idaho. These states have deep-rooted, business-friendly values that played a big hand in propelling job growth and real estate demand. Meanwhile, Blue States – headlined by California, New York, Illinois, and Connecticut – lagged behind considerably, particularly in the last five years. It’s likely that a mixture of anti-business policies (high income taxes and minimum wage) combined with a high cost of living put a damper on growth in these regions.
The COVID pandemic has put a magnifying glass on these differences, with heavy lockdown measures and political fear-mongering resulting in a massive 7.4% decline in Blue State jobs in 2020. While Red States have also lost jobs, their 2.4% reduction is 3x better than the Blue State levels.
The longer these job losses persist, the more permanent they will become, as Reventure Consulting has warned in previous posts. The fact that Blue States are on the negative end of both long and short-term economic growth is a bad sign for the future real estate markets in this areas.
Red = Affordable / Blue = Expensive
But understanding economic growth is just one piece of the puzzle. Home buyers and real estate investors also prioritize affordability. They want to know where they can find the best value for their money in terms of quality, location, and future growth potential.
It’s in this respect that Red States shine once again, offering homes and investment properties at nearly a 50% discount to Blue States. By the end of 2020 the typical price of a home in a Blue State was $367k, while the typical price in a Red State was $198k.
What’s also notable about the historical home prices is the relative stability evidenced in Red States. For instance, from 2007 to 2012 Red States experienced a fairly mild decline in home prices (-10%), while Blue States homes lost nearly one-third of their value. The previous bubbly tendencies of Blue States indicate the next housing crash could bring another painful decline in prices.
We can now combine the concepts of economic growth and affordability to get an even clearer picture about the future real estate dynamics across the country. The areas in the graph below to pay attention to are the top left – states that combine the positives of High Growth and Affordability – and the bottom right – the states that combine the negatives of Low Growth and Expensive Prices.
The political polarization is striking. The top left (High Growth/Affordable) is dominated by Red States such as Texas, Tennessee, and South Carolina, while the bottom right (Low Growth/Expensive) is littered with Blue States like California, Massachusetts, and New York.
Blue State Real Estate is in trouble. After all, if growth is poor, then why should real estate be expensive? Expect the next real estate correction to hit these Blue States very hard.
Do Local Politics Matter?
The conclusions are pretty striking so far – state politics matter a lot. Red States offer real estate buyers both strong economic growth and an affordable acquisition price, a great combination. Meanwhile, Blue States force buyers to pay high prices in exchange for meager economic growth.
But real estate is local. While it’s great to know which states to target and avoid, real estate investors also want to know which cities within those states are poised to deliver the best returns going forward. This begs the question: “Should I pay attention to local, city-based politics when conducting my real estate search?”
The answer is yes. But only at the extremes.
Ultimately, state politics will impact the future growth (real estate demand) of its cities more than its local politics will. For instance, if Texas were to suddenly charge state income tax and double its state minimum wage, Austin would experience a decline in corporate relocations and inbound migration, tempering real estate demand. In this way, state politics influence the demand side of the real estate equation more than local politics.
But if city politics tilt so far to a certain extreme, such as the excessively liberal environment in a place like San Francisco, it can have a negative impact on growth. In the case of San Francisco, progressive policies have worsened the city’s homeless and housing crisis, contributing to a mass exodus from the city over the last two years. The net result is that rental rates in San Francisco declined by over 25% in 2020 according to data from Apartment List, devastating local real estate owners.
Fortunately for the rest of the country, San Francisco is a rare case in excessive liberalism – its +60% Democrat voting margin in the 2020 presidential election is double Portland’s, a city that is known to be liberal in its own right. Thus, it’s unlikely that other cities will descend to quite the same depths of nonsensical, growth-killing political policies.
However, real estate owners in areas like Seattle, Portland, and Austin do have some reason for concern. Each of these metros is hovering around +30% Democrat and climbing, a level and rate of growth that is starting to result in concerning local policies. For instance, Seattle allowed a lawless protest zone to engulf a six-block area of the city for nearly three weeks in June 2020. Meanwhile, Austin passed the largest police budget cut of any US city in 2020. These policies have a concerning air of San Francisco-style progressivism, and will likely result in fewer people and businesses moving in these cities in the long-run, potentially hurting real estate values.
A metro like Columbus, which is a moderate +8 Democrat, or Tampa, at +3% Republican, is unlikely to run into such problems. Their local City Councils are more balanced from a political perspective and present safer political climates.
To sum it up: cities with excessively liberal local politics present additional risk factors for real estate investors. The ideal situation is to target a city with moderate political slants, located in a conservative state, as your investment is more likely to benefit from pro-growth political policies.
Reventure Consulting uses high-end data analytics to advise real estate owners, developers, and lenders on the best locations to invest their capital. To learn more submit a contact form today, leaving your name and a brief description about your real estate investment goals.