"Hot" markets explained + why you should Buy Now!

Buying & Selling Real Estate
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"Hot" markets explained + why you should Buy Now!

Jon Q.
Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes

Now is the time to BUY!

Here is what is occurring in virtually all "hot" real estate markets nationally:

"Hot" = strong population and job growth markets and therefore increasing price trend line 

This applies to San Jose, San Francisco, Los Angeles, Seattle, Denver, Dallas, Austin, San Antonio, Houston, Charlotte, Raleigh, Atlanta, Ft. Lauderdale and many other markets on the list below...  

This specifically is a chart of market price, as it moves through real estate market cycles in a "hot" market that has an increasing price trend line.  Once prices surpass the point in the center, your ability to cash-flow disappears (though there are a few exceptions). Again, although there are a few exceptions.... Generally... for SFRS with 4 bedroom / 2 baths, once price moves beyond $120/125K, generating cash-flow becomes difficult if not impossible.   With 3 bedroom / 2 baths, once price moves beyond $100/110K, generating cash-flow becomes difficult or impossible. In "hot" markets, although market cycles are continuously occurring and prices rise a fall... there is an increasing trend line and therefore the next bottom will have market prices that are higher than the last bottom. Market prices rise at a faster rate than market rents, so... your ability to generate cash-flow eventually disappears.  In this chart, that is the point in the center.   Exceptions: Though unusual, it is possible for these situations to occur: Markets where rents are rising at the same rate as market prices.  Dallas MSA might apply, but although rents are rising quickly, I think prices are rising at a quicker rate. Fixers Acquired at Deep Discount.  Properties that you can acquire at a severe discount to market price because there is a significant problem with the problem and you're able to fix it for less than the discount you were able to negotiate on the purchase price. Other exceptions? Thoughts?

Hot Markets

Here is a list of states ranked by population growth percentage (column 3). For purposes of this post, I would define a "hot" market as markets that are in the top 20 in this chart.

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Josh Caldwell
Investor · Dallas TX, United States · Member since 2014 · 1k+ posts · 1k+ votes
9y

This is a fantastic time to buy real estate, but not in the hot markets.  Hot market get hot because people speculate into them and drive the prices beyond sustainable cash flow levels.  IF you invest with this model you will get you *** handed to you eventually.  Those of us who learned this lesson in 2008, invest for cash flow not appreciation. My market of Pittsburgh is a great cash flow market. Our rent to price ratio is much better than anything you will find in CA.  Find a market that looks like mine does and invest for the long term.  

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  • Jon Q.
    OP
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    9y
    Originally posted by @Bill S.:

    @Jon Q. your population chart is a bit out of whack. For example the one area I know a little about (Colorado) has already meet the projected population growth of 30%. According to the census bureau the population in Colorado was 4,327,000 in 2000. According to World Population Review. They project based on Census projections and estimate the current population at 5,658,000. That is roughly the 30% change and we still have 13 more years to go. I understand when writing for a broad perspective sometimes the specific numbers aren't as accurate as could be the case. I would suggest you update your population projections since that's a key piece of information to determine your "hot" market.

    Bill, there is no update. The census is only done every 10 years and they do a 30 year projection.

     Everyone is working with the same data as my friend.  And the most accurate population data comes from the US Census.

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  • Jon Q.
    OP
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    9y
    Originally posted by @Bill S.:

    @Jon Q. your population chart is a bit out of whack. For example the one area I know a little about (Colorado) has already meet the projected population growth of 30%. According to the census bureau the population in Colorado was 4,327,000 in 2000. According to World Population Review. They project based on Census projections and estimate the current population at 5,658,000. That is roughly the 30% change and we still have 13 more years to go. I understand when writing for a broad perspective sometimes the specific numbers aren't as accurate as could be the case. I would suggest you update your population projections since that's a key piece of information to determine your "hot" market.

    As far as I know, the U.S. Census is the only org in the country that actually counts residents, so although possible, I think it's unlikely there's more accurate data out there.  But I don't have any reason to doubt your numbers and I really like the Colorado markets. It's too bad that I wasn't able to buy in this market pre 2010... I was focused on other markets at the time.

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  • Stefan Tsvetkov
    Investor · New York, NY · Member since 2017 · 263 posts · 118 votes
    6y

    @Jon Q. I agree, from a buy and hold perspective, buying into "strong population and job growth markets and therefore increasing price trend line", is a good approach, in part due to momentum/autocorrelation, and also yes, these markets have the strong fundamentals. 

    This is assuming a "deal", at the property level, can also be found, and surplus cash flow/appreciation combined bring the highest total return.

    That said, "strong population and job markets" seem more likely to become overvalued at some point, so one needs to pair the above data with valuation ratios to protect from a drop at peak of cycle.

    E.g. some of the strong population/job growth areas in recent decades, cities in Colorado, Texas, Idaho, Arizona, Nevada are currently overvalued: Boise, Las Vegas, Austin, Fort Worth, Phoenix, San Antonio are overvalued >10% as of Q1 2020 based on historical price-income relationship.

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  • Kyle MccawBusiness Member
    Property Manager · Keller, TX · Member since 2011 · 1k+ posts · 1k+ votes
    6y

    @Stefan Tsvetkov I agree that prices are higher than historical price/income ratios in Austin and Fort Worth. However this is due to the crazy high number of jobs coming to these two markets and too few homes. I have no crystal ball. But the inventory needs grow significantly before price could even think of dropping. 

    McCaw Property Management4.4902 Reviews
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  • Stefan Tsvetkov
    Investor · New York, NY · Member since 2017 · 263 posts · 118 votes
    6y

    @Kyle Mccaw I agree with your comments. Housing shortage place a material role on valuations. That said % valuation above should indirectly reflect that, as uses a trailing history of price-income ratios, that shift up as shortage happens (i.e. above valuation % reflected downward for the shortage already)

    Seems good to study Census data on population/housing supply at the county level to see how exactly shortage has evolved in Austin/Fort Worth. I am curious myself too.

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  • Shannon Robnett
    Developer · Boise, ID · Member since 2020 · 173 posts · 198 votes
    6y

    So @Stefan Tsvetkov why is it that a majority of investors continue to pick over a picked over market even knowing it is 10% overvalued at the time of the search? When will investors pivot and begin to look at other ways to get in the game while protecting themselves from being the last guy in or getting in to deals that do not cash flow just because the "have to get into that market"? I live and build in Boise and shake my head almost daily at what people are doing here with purchase prices when there are plenty of other options in other product type available in the Boise market. Just because you want a SFR should you buy one at 10% over market and cash flow negative just because you "know" it will go up? Rather would you be better off to look at the same market for different ways and opportunities to be involved in real estate?

    I agree we are facing a nation wide shortage and this will continue to put pressure on pricing but buying over priced existing for appreciation the not only way to go in those markets.  And strong markets always have more than one angle @Kyle Mccaw as you well know.  And then once you have deployed capital into these strong markets you are always struggling with the question of when will the cash flow catch up with the appreciation and what do I do with the highly appreciated asset that is under performing  cash flow.

    Its times like these that you see the innovators look at things a bit different and finding another way to solve these problems in these markets while still staying covered in the investment from a leverage point of view.  New construction syndication are a great way for this to happen as these markets have strong need for housing and an ever growing need.  Markets with strong job demand will continue to have demand for new product as they go hand in hand.  First we need the work then we need the workers, and the same cycle happens for workforce and affordable housing, but that does not always mean class B/C product.

    Regardless of strategies deployed they always need some tweaking for exact market conditions and availability.  Especially when an investor is coming from a congested state, like California for instance, to a place like Texas where there is still plenty of room and land to grow.  the question is just when will people look for those other options.

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  • Stefan Tsvetkov
    Investor · New York, NY · Member since 2017 · 263 posts · 118 votes
    6y
    Originally posted by @Shannon Robnett:

    So @Stefan Tsvetkov why is it that a majority of investors continue to pick over a picked over market even knowing it is 10% overvalued at the time of the search?  When will investors pivot and begin to look at other ways to get in the game while protecting themselves from being the last guy in or getting in to deals that do not cash flow just because the "have to get into that market"?  

    I agree we are facing a nation wide shortage and this will continue to put pressure on pricing but buying over priced existing for appreciation the not only way to go in those markets.  

    I agree with your general line of thinking. Here are my comments, some extra points:

    1) Most investors do not know if specific markets are overvalued. The market is "overvalued" within the framework of a given metric or set of metrics only, and most real estate investors do not compute those. Don't forget this is not the financial industry, where educational backgrounds are much stronger.

    2) Valuation only matters at peak of cycle. Momentum drives prices before this. It may in fact be rational to invest in an overvalued market at intermediate points in the market cycle. 

    3) Properties in a market being cash flow negative, which correlates with low absolute affordability, is generally not equivalent to the market being "overvalued", the latter driven by changes in affordability rather.

    4) I don't think there is a "nationwide shortage". I see population/housing supply ratios below their levels of 10 years ago in ~30/50 states. There are probably ~15 states where more pronounced shortage is present, and yes such dynamic can shift prices upward, especially in small geographies/metro areas.

    Hope this helps!

    1Reply
  • Shannon Robnett
    Developer · Boise, ID · Member since 2020 · 173 posts · 198 votes
    6y

    @Stefan Tsvetkov 

    Your perspective is interesting although not one I would agree with.

    1.  Any investor worth his salt with basic calculator skills knows when a deal does not pencil and my question was more to the sanity of continuing to buy when that logical metric has long been bypassed.  That is where you have slipped from the role of an investor to the role of a speculator and they are very different.  My question was more as to why do people continue to do it?  We see it in the stock market all the time and about every 10-12 years in real estate.

    2.  Valuation or what something will transact for is used at every point in the cycle, its just less scrutinized by someone speculating than someone who is actually looking at the fundamental value of the underlying asset.  Ray Dalio speaks about this concept at length in his best seller Principles.

    3.  Housing in a particular market not making enough of a return to keep up with inflation in relation to price would indicate that the investor is indeed going backward in that particular situation and has gone again from an investor to a speculator.  Remember 2008 and the lesson that yesterday's demand and price does not guarantee tomorrows value.

    4.https://www.cnbc.com/2019/11/2... 

    https://dsnews.com/daily-dose/...

    https://www.habitat.org/costof...

    Some news articles that contain statistics that speak to a national housing shortage.  Remember the law of supply and demand?  Lack of supply creates increased demand and higher prices.  If we have an over supply we will have less demand and prices will drop.  And as stated in the articles we are simply not keeping up with demand and this is the biggest factor in rising prices in 40 of the 50 major metros included in one of the cited studies.

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