Best Buy Cities: Where To Invest In Housing In 2018
After another year of rising home prices and declining inventory across the country, it has become increasingly difficult to find a place to lay your money (and head) with a reasonable expectation of a return on your investment. Sweet spots, nevertheless, are still scattered across the nation. These cities offer a rare combination of better than average job growth and some runway before homes become overpriced--both things anyone looking to make a smart real estate investment should be after.
To find out where you should be house hunting this year, Forbes tapped Local Market Monitor, which tracks more than 300 housing markets. For each market CEO Ingo Winzer (a Forbes contributor) analyzed housing indicators as well as broader growth trends to come up with 20 markets where you can park your money in 2018 and still sleep easy.
If you are looking for a quick flip these may not be the markets for you. These are not necessarily the places where prices will grow the most in the near future. (The three-year price growth forecast for the 20 cities on this list range from 11% for Washington, D.C., to 35% for Orlando.) Rather, these are the places where that growth appears most sustainable over the medium to long term.
“High-growth markets are always attractive,” says Winzer. However, “in a few years today's growth markets may be in over-priced territory. Markets with medium growth can also be a better bet for investors because there's less competition for choice properties and they can buy at a more favorable price.”
Orlando outperforms: The land of Mickey Mouse and Harry Potter World takes the No. 1 spot this year. Orlando home prices increased 9% in 2017, hitting an average of $247,550. Nevertheless, Local Market Monitor still judges the market as fairly valued and forecasts prices will increase 35% by the start of 2021. That optimism is thanks in large part to Orlando’s 7.1% job growth over the past two years and 7.6% population growth over the last three. In general, Orlando does well when America at large is doing well, since its economy depends largely on tourism. It also doesn’t hurt that Orlando’s home prices, still dinged by the housing crash, are 22% below the national average. "Orlando has recovered in the sense that job growth has been strong and home prices are moving up along with income at a healthy pace," observes Winzer. "Home prices are still below the peak of the bubble, so in that narrow sense they haven't recovered."
Tech threat: On the opposite end of the spectrum are several West Coast and Texas cities, where strong demand from high-paid tech and energy workers has brought prices to the edge of affordability. Not long ago some of these cities looked like safe bets, but lightning fast 2017 price growth has added risk. Austin, Texas, for example, took the No. 7 spot on our 2016 list. After a 7% rise in 2017 to an average of $305,000, home prices are now 30% above the price to income ratio the city has historically supported. In Seattle, No. 4 in 2017, prices are 25% higher than historically viable. Last year Seattle prices grew 14%—more than any other big city in America and already more than half the growth Winzer had anticipated between 2017 and 2020.
Read more about the cities where it might be time to sell here.
Sprawl: Reflecting widespread price growth and prosperity, the cities on this year’s list are diverse. They range from Boston in the northeast to Sacramento in northern California. Fifteen states are represented in all and none claims more than two spots—a change from 2017 when Florida and Texas alone held seven spots.
Notable newcomers: To that end, eight of the 20 cities on this year’s list did not make it in 2017. The highest-ranking newcomer is No. 2 Provo-Orem, Utah, where the average home price of $266,169 is right in the sweet spot for local affordability. Other newcomers include No. 5 Ogden-Clearfield, Utah, No. 8 Springfield, Mo. and No. 17 Washington.
To compile this list Winzer began with 330 markets. He first removed ones that were too small (populations below 500,000) and then discarded those that performed worst on key metrics. Finally he drilled down to the 20 markets that scored the best across five measures: one-year job growth, three-year population growth (2014 to 2017), one-year home price growth, affordability and Local Market Monitor’s own three-year home price forecast. We used job growth to rank the list this year. “At this time of surging prices, a good economy is a better long-term criterion for investment” than price growth, notes Winzer.
To judge affordability Winzer uses a measure of home price versus income price, which he calls the Equilibrium Home Price. That is the real current average home price in a market versus what that price would be if the historic relationship between home prices and income held for that market. For example, in Columbus, Ohio, the average home costs $229,776 or about 4.65 times the local per capita income. Historically, however, homes in Columbus have sold for 5.38 times local income. The gap between the two suggests homes in the city are 13% underpriced. (For more on Equilibrium Home Prices read: Real Estate Growth Market Or Impending Bubble? How To Tell The Difference)
Winzer considers a deviance of 15% to -15% from the historical income price to be normal. In general, a market is deemed overpriced if this measure is 30% or more above income price. While being underpriced is a positive for people buying in a city where the economy is growing, it can be a big negative in places without growth on the horizon. That, for example, is why Chicago isn’t on our list. Yes, home prices are underpriced by about 20%, but job growth there is far below the national average. "You can find plenty of bargains in Chicago, but until the economics improve you'll run a risk of not finding renters," says Winzer.