Which are the best markets for real estate investment? The cute answer is that you can make a good investment in any market; for each of the 200 markets we follow on a regular basis, there’s an investment strategy that best suits the local economic circumstances.
But aside from that broad advice, if you have a choice of markets, how do you pick one with the best chance for a superior investment? Prudent investors will do their due diligence.
The first thing to do is look at home prices. Whether you plan to flip houses in a rising market or rent out an apartment for the long term, home prices show the balance between the supply and demand for all housing. Ranking the 100 largest U.S. markets by how much home prices increased in the past year, we see a list whose top and bottom look like this:
Boise 11% .
Tacoma 8% .
Phoenix 8% Los Angeles 3%
Tampa 7% Chicago 3%
Memphis 7% Honolulu 1%
Ogden 7% San Francisco -1%
You want to stay away from markets at both the high and low end of this list. At the high end, prices are rising at an unsustainable rate, which gooses rents but can’t support them in the long run. At the low end, you’re either buying into a depressed market with a shrinking population (Chicago) or a bubble market that’s peaking (San Francisco).
A 5% or 6% increase in prices shows good demand. About 50 markets had that kind of increase in the past year, but we want to be sure demand stays strong in the future. A growing local economy is the best driver of demand for housing, so the next thing to do is look at the rate of job growth.
In the middle of the COVID-19 pandemic it’s ridiculous to rank according to job growth—there isn’t any. Instead we’ll rank our 50 markets by how well jobs grew last year. Again, the top and bottom of our list look like this:
Austin 3.2% Orlando 2.1%
Nashville 3.2% Fort Worth 2.1%
Salt Lake City 2.9% Omaha 1.9%
Bakersfield 2.9% Charlotte 1.8%
Jacksonville 2.7% .
San Antonio 2.5% .
McAllen 2.4% Gary -0.7%
Philadelphia 2.3% Akron -1.3%
In normal times a growth rate above 2% is very good, so now we’re down to ten markets that had good growth in the past and therefore will probably have good growth—and good demand for housing—in the future.
Market Stability: Future Job Growth and the Best Price Range
For many investors that’s enough. Pick any of these ten markets and you’ve already boosted your chances for a very good investment. But if you have the time and willingness to wrestle with more numbers, it’s worth looking even closer. Then we can see how stable a market is, how the pandemic may affect future job growth, and what the best price range might be for your investment.
Local Market Monitor tracks these stats in our Investors Metro Analysis reports. For example, look at these pictures from the reports of home prices and jobs in Fort Worth over the past few years.
Although home prices increased 5% in the past year, the trend of prices has been downward. The chart on the right shows why: home prices rose well above local income and the market is now over-priced, which means both that future price increases will be lower and that an investor will be buying near the top of the market.
The middle chart shows both that jobs increased at a good rate before recession and that the loss of jobs during the pandemic has so far been lighter than the 12% national average. These are good signs for future growth, however, they must be balanced against the large number of local jobs that depend on the Dallas-Fort Worth airport; airplane travel will be depressed for years and the airline industry will shed many jobs.
Favored Price Range
Finally, statistics about the actual list of rents in a local area allow us to calculate the favored price range within which an investor has the least risk because that is where demand for rentals is the strongest. This range is different from zip code to zip code. Here are examples from zip codes in the Fort Worth area:
76016 Arlington $309,800 to $527,400
76021 Bedford $198,500 to $330,800
76116 Fort Worth $161,900 to $332,300
76123 Fort Worth $355,400 to $473,900
76244 Keller $459,100 to $565,100
Above the favored price range you’ll have trouble finding renters during an economic downturn (like right now), below the range more tenants have financial difficulties. You don’t have to buy within this range—the returns on high or low-end rentals can be greater—but by knowing where it is you can decide how much risk you want to take.
In the end it always comes down to a specific property at a specific price. Analysis can only take you so far and the future remains unknown (who ever heard of COVID-19 six months ago?), but investors can use some simple stats to find favorable markets and increase their odds for success.