Coming to Middle America: A Mini-Boom?
Well, at least in terms of real estate investment value.
The middle of the country — the nation’s so-called “red states” (termed as such for their political leanings) — may be red hot housing markets by the end of the decade.
That’s right, signs point to the real estate boom shifting to the U.S. heartland — the vast expanse of America that has yet to be reached by the vast appreciation in values seen by most coastal housing markets.
That’s what a new statistical analysis of the housing price cycles in 100 major metropolitan areas suggests could be on the horizon, reports Kenneth Harney of the Washington Post Writers Group. The study conducted by First American Real Estate Solutions‘ director of research, Christopher Cagan, examined historical housing price movements and concluded that metropolitan real estate markets can be classified into three categories:
- Linear markets
- Cyclic markets
- Hybrid markets
By understanding these markets and which apply to various regions of the U.S., we can get a better idea of where the gains (and drops) will hit next. Linear markets, as the name suggests, are areas were booms and busts rarely occur, if ever. Prices plod along and gain modestly. Much of Middle America fits into this category — prominent examples being Indianapolis, Houston, San Antonio, Atlanta, Cincinnati; Des Moines, and Memphis.
Cyclic markets, conversely, are the stuff of housing booms. Generally they are located along the East and West coasts, with incomes higher and land in short supply. The South Florida housing market is a prime example, with a large part of California, Washington, D.C., Baltimore, New York and New England also fitting into this category.
When cyclical market conditions peak, annual housing gains in these areas can exceed 20-30 percent. Typically, however, housing booms burn themselves out when prices are pushed to unaffordable levels. Sometimes, the fallout is substantial — a drop in prices of 15-25 percent, as we saw in Southern California in the early 1990s after a multiyear boom. Mostly, corrections are less severe, with appreciation flattening for a bit.
Hybrid markets, as you might expect, have slow-growth characteristics for periods, followed by spurts of moderate cyclic-style appreciation. You may not see a Florida real estate-style boom, but you won’t see a correction like you would in more volatile markets either. Chicago, Seattle, Detroit and Phoenix fall into this category.
When this analysis is taken into account, the remainder of the decade looks to offer strong real estate investment opportunities for linear real estate markets — at least ones with expanding employment bases and moderate home prices.
With Florida home loan rates on the rise, the state’s housing cycle is at, or past, its peak. On the other hand, other housing markets such as Colorado and Texas, plus the energy belt areas of the Southwest, are linear — and appear poised for some above-average price increases and home building in the coming years.
Cagan calls Texas the beneficiary of the energy crunch squeezing the rest of the country, as the Lone Star State’s strong job growth and affordable housing prices likely to lure plenty of investor interest. Compared to any of the South Florida markets, or California, Washington, D.C., or New York, Texas real estate appears dirt cheap.
Equally important is the fact that major heartland markets are nowhere near their home price growth limits, based on examination of household incomes. Not to mention the fact that many heartland metropolitan areas are nice places to live and work — with good schools, parks and open space, plus the chance to actually afford to buy a home with the median income.
Those qualities could accelerate population movements as families (as well as companies) in high-cost, high-tax cyclical markets consider relocating to interior areas of the country with solid local economies and pleasant living environments. Federal tax policies could support the trend as well, with homeowners in cyclical markets cashing out their appreciation gains and putting their $500,000 tax-free capital gains into property in more moderately priced markets.
The bottom line? Understand where you are in the housing market cycle and adapt.
