Posted almost 6 years ago

Where to invest, finding that right balance: Opp & Affordability

One of my biggest frustrations has always been where do I invest my hard earned and sacred dollars when there seems to be so many options and many are moving targets. Clients are requesting to find returns higher and higher than ever before and yet it seems like we might be facing another recession of sorts as well as sighs of deflation…

So what advice can I give?

Here are some thoughts on finding that sweet spot in real estate market timing:

In most places, healthy job growth translates into increased housing prices. As more demand for housing from people landing those jobs runs headlong into an existing and limited housing supply that is typically slow to respond to changes in employment. The trick is to find those markets that find a sweet balance of affordability and growing employment.

On the other hand; where neither affordable housing, nor decent employment are lined up properly you will often see declining opportunities and an increase in risk.

Throughout the year, we used data to compare metro areas on these two features. This is no exact science and by no means is all you would need to be able to make proper investment decisions. However when considering recent price-to-income data, and the most recent employment data from the Bureau of Labor Statistics you should be able to see a good metrics of where to look into and where to avoid.

Almost three-quarters of metros analyzed (195 of 265) experienced some employment growth since the last time we ran this analysis, and slightly more than half (145 out of the 265 metros) experienced some improvement (in this case, a decline) in the price-to-income ratio.

Greely, Colorado; Madera, California; and Gainesville, Georgia, experienced the largest outright moves. A small deterioration in affordability outweighed a substantial gain in employment in Greely. More modest gains in employment and improved affordability was the story in Madera and Gainesville.

Sweet spots getting sweeter include Dalton, Georgia; Wausau, Wisconsin; Fayetteville, Arkansas; Reading, Pennsylvania; Ocala, Florida; Macon, Georgia; Evansville, Indiana; Burlington, North Carolina; Jacksonville, North Carolina; Atlanta, Georgia; Appleton, Wisconsin; and Charlotte, North Carolina.

Sour spots getting more sour include El Centro, California; New Orleans, Louisiana; Cleveland, Tennessee; Ann Arbor, Michigan; Punta Gorda, Florida; Baltimore, Maryland; College Station, Texas; Las Cruces, New Mexico; Missoula, Montana; Great Falls, Montana; Richmond, Virginia; Columbia, Missouri; and Bloomington, Indiana.

Atlanta is the largest large metro area ranking well for both affordability and opportunity, followed closely by Houston, Kansas City and Indianapolis. Among big markets that rank poorly are Washington, DC, Milwaukee and Boston.

Normal 1439329552 CA Employment Growth

Normal 1439329575 Zillow Graph Affordability

Predictions for the end of 2015

  • Growth in U.S. rents will outpace growth in home values by the end of the year.
  • Home values are predicted to grow 2.5 percent while rents are predicted to continue rise, at a rate of 3.5 percent annually.
  • Millennials will overtake Generation X as the largest group of home buyers
  • Millennials have been delaying marriage and having children, but that doesn’t mean they don’t want to buy.
  • Builders will begin constructing more, less expensive homes
  • Builders will stop concentrating on the upper tier of the market and will begin to build more entry-level homes.
  • Home buyers will have more negotiating power in 2015
  • Slowing appreciation, more inventory and the return of price cuts means potential buyers will have more choices and won’t have to move as fast.
  • We will be in a recession or maybe we we are now.

Comments (3)

  1. Greg,

    Thanks for the post and technical info. I found it very help and informative.Consideration of economic indicators is something that should be analyzed when considering any business decision. Although they do not guarantee what will happen in the future, application of a standard deviation formula can greatly increase an individual/company's expectations of what to expect. 

    Once again, thanks for the informational share and my personal regards to you and yours.

  2. The point of the article is to discuss the price to income ratio; it is just merely Technical Analysis for the public to help in making informed decisions and help predict the near future.  Affordable Housing and job growth and not creating the optimal opportunities and can create a widening gap which can create issues for appreciation and stability.  I believe Richmond will see good appreciation next year or two but again employment and wages are not keeping pace.

    We look at many markets and have invested in Columbus Ohio over the last few years mainly. We have also purchased notes and other assets in the right markets. I invest in many areas and not just cash flow but that has been a major focus for us.

  3. Hi Gregg,

    Hope you are well and thanks for the blog. Question, why do you consider Richmond City, VA as a "sour spot getting more sour ?" Are you looking from a cash flow standpoint or price appreciation and/or flip potential? It seems quite counter to what I have been reading online about Richmond City. Please see as an example:

    Apparently Richmond City has a pretty low unemployment rate at around 5% with annual gross yields overall of nearly 20%. If not here, where are you investing these days? Are you a cash flow investor as well? I appreciate your feedback in advance.