Real Estate

Best Bets For Real Estate Investors

The great home price deflation is already upon us. Prices in some parts of the country are already down ten percent from the peak in May-June of 2022 and will drop more – maybe another ten percent.

In this situation it’s best for investors to sit on the sidelines for a while, at least until late 2023, but they can already scout around to find where the best long-term possibilities will be found.

In normal times future opportunities are strongest in local markets that are growing at a good clip. Job growth drives the demand for real estate, but right now it’s difficult to know which markets are growing best because they ALL seem to be doing well. Even places like Akron and Buffalo, where the population has shrunk, are adding jobs at a two percent annual rate.

The reason for this seeming fountain of general prosperity is that the economy is still feeling the effects of the pandemic. In the first few months of lock-downs – in early 2020 – 22 million jobs were lost. A year later 14 million of them had been recovered; in another year the rest of them seemed to be back; in the past year 4 million jobs were added.

The problem is that jobs have returned at different times to different parts of the economy. Among the five largest sectors of the economy, retail jobs rebounded first, then jobs in business services. Jobs in healthcare, at restaurants, and in government have come last and right now are being added fastest; but this gives us a false sense of growth because these are still recovered jobs, not new ones.

Sure, if healthcare, restaurant, and government jobs keep up this pace of growth the economy will be fine for years. But they can’t. These are personal service jobs that normally only grow as fast as the population grows, and the US population is growing less than a half percent a year.

To find out the sustainable growth of jobs in local markets we need to adjust the annual rate at which healthcare, restaurant, and government jobs are added to a lower level, say one percent.

Other local market measures to consider are the increase in population, how far home prices could fall, and how much the average home costs. A lot of people and companies moved out of California in recent years because home prices just got too high. Favorite spots like Austin, Seattle and Phoenix could be next.

I’ve put together two tables of prospects using data from Local Market Monitor, one for large markets and one for smaller ones – where there’s often less competition.

In both tables, the first column of numbers shows how much the population increased in the past three years. It’s likely but not certain that such increases continue in the future. The population of Salt Lake City, for example, increased two percent from 2018 to 2021, but in 2022 was flat. In Boise the three year increase was 9 percent, but just one percent in 2022.

It’s because population flows can change abruptly that we look at job growth as an indicator of future demand for real estate. That’s what the second column shows. These are the adjusted rates I described above.

The third column shows price risk, how much home prices could drop in an economic turndown. In most of these markets the risk is in double digits, which is why investors should sit on the sidelines until later this year. It’s not a forecast but I wouldn’t be surprised if prices drop half that amount in the next 12 months.

The final column shows the current average home price. There’s less risk investing in a property that costs less; and when prices get very high, as may be the case in Austin, Salt Lake City, and Seattle, people don’t want to move there.

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