It’s more important than ever to understand the local drivers supporting the markets you’re invested in or thinking of investing in.
When excess liquidity is propping up all real estate markets, nearly any real estate investment does well. This phenomenon has been on bold display the last 20 years.
As the liquidity-tide goes out, markets with underlying sustainable growth will stand out stronger than most. As an attendee of the recent IMN Single Family Rental Forum Conference, it’s clear that institutional investors are already taking note of this and making moves.
Here’s some important factors to keep your eye on when analyzing local real estate markets and planning your next move …
Migration Trends. As Ken McElroy says, “Real estate exists for people!” People are the primary driver of real estate prices and rental rates. Watching where people are moving to (and from) gives a lot of insight into where local businesses and real estate will be supported.
Demographic Structure. Household age and size are demographic factors that affect local real estate demand over time. Historically, growing family households wanted more space (for example, demand for homes with a yard), while aging households might desire proximity to healthcare and downsizing to low-maintenance properties. However, with the American Dream out of reach for many young families, the modern family’s needs are shifting more and more to shared-housing solutions.
Jobs. Whether it’s rent or a mortgage payment, job growth (and/or income growth) means growing capacity to pay for in-demand housing. Businesses that create local jobs in industries that are beneficiaries of demographic and social trends create a sustainable foundation for local incomes. On the other hand, with the work-from-home movement, people can import their high incomes from out-of-area jobs and live instead where the amenities, climate and social atmosphere is desirable. Markets that offer both have clearly been big winners.
Local Regulation & Tax Treatment. Businesses (the driver of job growth) are attracted to jurisdictions with friendly business regulations and tax treatment. High-income earners are attracted to states with low or no income tax.
Supply. While the previous factors drive (or diminish) demand, an overabundance of supply of housing can neutralize the impact of demand to drive higher prices. It’s equally important to watch supply. There’s plenty of reports demonstrating the current undersupply in housing (with varying approaches resulting in wildly different total numbers of housing shortage). You’ll need to get very granular to your markets of interest.
Affordability / Bubble Factor. Whether you’re talking stocks, rents or house prices, the index for measuring a bubble always comes back to some version of price-to-earnings or income multiple. When the upward pressure on prices reaches a point where the income, earnings, or cash flow cannot continue to rise at the same pace as the prices, prices stagnate or revert back to the norm. Something has to give (like mortgage terms or price) … or someone has to move (either geographically or in socioeconomic class). Even if you have extremely tight supply (not a lot to go around) and high demand (everyone wants it), you still must have capacity-to-pay (enough folks that can afford to purchase) or sales will still drop.
Absorption. Measuring how many available homes are actually selling in a given time frame and how quickly homes for sale are being absorbed into the marketplace can give you an idea of an area’s balance of supply and demand for that particular asset type. Absorption Rate equals how many houses sell in a month divided by the total houses on the market. DOM, or Days On Market, is one of the easiest ways to see how quickly (or not) inventory is flying off the shelves (or lingering). Historically, Absorption Rates above 15-20% and DOM below 5-6 months indicate a seller’s market.
Hopefully you find these resources helpful! We’re here to help you run numbers on various strategies and scenarios.
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