MSA vs city vs county historic price performance. Does it matter?

[Chris Martin]

This post looks at a somewhat newer investment philosophy/methodology, one that a lot of investors (and homeowners) are contemplating or embracing as housing prices and scarcity push some buyers out of the higher-priced city markets. The idea is to buy investments that are not directly in the expensive cities, but are 'close by'... as in neighboring counties. This post is single focused and looks at housing price performance and not historical data points like rental prices or builder margin. Arguably, comparing historical income streams would be more valuable, but I'll leave that for someone else or maybe I'll post later. 

I'll put my commentary in for each of the four charts representing what I call the "Big 4". I obtained all this data (and charts) from the freely available Federal Reserve Economic Data (FRED) database, which obtains data from US FHFA. The gray vertical blocks are times of recession, with the latest being the GR (great recession). I tried to keep all the chart data consistent, starting with the year 2000. 

Asheville is the largest city in Buncombe county. As the chart shows, the county and city housing price performance are reasonably consistent over time and outpaces the outlying areas. The housing price performance of surrounding counties has struggled to return to pre-GR levels.

Wilmington, located in New Hanover county, has on a price performance basis outperformed the greater area. The surprise to me is that Brunswick county performed better than Wilmington from 2000 until the GR. Maybe that's because of the off-the-charts Leland (in Brunswick county) growth. I put Jacksonville NC (the other large NC coastal city) in the chart as well to compare the long term housing price underperformance of this military town relative to Wilmington.

Raleigh, more specifically the RDU area, continues to perform above my expectations on a price performance level. The Orange, Durham, and Wake county performance mirrors the Raleigh-Cary MSA performance which really isn't much of a surprise. Wake county growth continues outside of Raleigh proper. The southern surrounding counties of Harnett and Johnston have historically lagged somewhat in price performance. The following table shows the counts of 2018 new construction property cards for the top dozen cities added in Wake county, showing that Raleigh isn't the only driver for development: 

1593 APEX
787 CARY
467 FUQUAY VARINA
247 GARNER
318 HOLLY SPRINGS
153 KNIGHTDALE
149 MORRISVILLE
122 NEW HILL
1432 RALEIGH
793 WAKE FOREST
221 WENDELL
169 ZEBULON

In Charlotte. like Asheville, the 'play' has been in the city/county and less the surrounding counties. The city of Charlotte seems to have a big footprint in the county, hence perhaps the stronger correlation with county data. 

As they say in the stock market, past performance is not a guarantee of future results. In general, from a historical price performance standpoint, counties outside of the Big 4 have underperformed the city and the county containing the city. Going forward, will this be the case? I'm curious to hear the opinions of BP Nation for each of these four scenarios. 

I must admit that as I pointed out in What Macro Data Study Should BiggerPockets Provide to Investors? I'm not that much of a fan of macro housing data, simply because on a Metropolitan Statistical Area (MSA) level, city level, or county level the macro data doesn't provide me with actionable information. I will say, though, I do frequently use macro data since it may point me to the right ballpark. Well, I should say the right city that contains the right ballpark. Ultimately I want to get a preferred seat in the right ballpark, a seat that isn't in left field somewhere but one that gives me a good return on what I pay for my ticket. That trick, selecting areas, towns, and neighborhoods,...  I'll leave that for another post. 

[Will Kaufmann]

@Chris Martin Thank you for providing this information! After reading through I have a qualitative point to make. We have, as a society, been experiencing heavy urbanization for a while now and I think that contributes to the above trends. 

What happens if or when that trend changes? My guess is that the housing needs in the outer edges of the MSAs will increase with the population looking for more affordable pricing and living while still within reasonable reach of the amenities at the core of the MSAs.

What reasons may lead to a trend shift? One issue might be ultimate lack of affordability. Look at the inflation chart below, which is not moving lock-step with increasing housing prices. Additionally, wage increases have been lagging pretty substantially as shown in the second chart. There are also possibilities tangential to something like Amazon opening a huge warehouse in a city like Garner (who would've thought about that even just a few years ago?) and whatever impact that could have. Another reason: overcrowding. I also have a theory that as drone usage becomes more pervasive people will not feel the need to buy in the city to gain access to urban services (e.g., Amazon fresh/prime/etc.).

I am not beating the drum for a housing crash. My philosophy is to look at the cities and counties closest to the high-growth MSAs and provide a better housing product for those who cannot afford the core-city growth and pricing.

To directly answer your question, I think the MSA indicates that when the market eventually does correct, you could interpret the data to show that the outer areas, not the cities, should encounter less negative headwinds, based on a comparison of pre-GR and post-GR trends. What do you think?