The usual ways to assess real estate markets are out the window this year. The standard equation is that more jobs lead to more demand for housing, but with a massive loss of jobs in all markets this year, that analysis doesn’t work. So, how can we now decide which markets are the best bets for investors in 2020?
We have to start with the belief that the current situation is temporary, that economic activity will resume over the next year or so, and that most jobs will eventually return. If that’s not the case (remember, the virus is in charge, not us – as Dr. Fauci says) you might as well keep your money in the bank because we’ll have a long slide in real estate values.
But assuming that most jobs will return and that we won’t see a wave of home sales by desperate owners, there are other ways to figure out where and how an investment makes the most sense – and with the least risk.
A typical suburban house in the Raleigh, North Carolina area
flickr Editorial/Getty Images
First, which markets were doing best before the Corona recession? Nashville, Phoenix, Seattle, Jacksonville, San Francisco, Utah markets, the big Texas markets, Philadelphia, Tampa, Raleigh and a dozen others were growing at strong rates earlier this year.
Strong growth creates problems of its own, most notoriously price bubbles that push real estate values to unsustainable levels, but it’s most likely that good growth will return fastest in the markets that already had it – unless the coronavirus permanently changes how we behave… more about that below.
A second way to judge the relative attractiveness of markets is to see how badly the recession has affected them so far. We have very few hard facts as of now but will get more in the next couple of months. The first fact we do know is that 13 percent of all jobs in the US were lost in April. How did individual markets measure up against this average?
At the good end, the Utah markets (Ogden, Provo, Salt Lake City) lost around 7 percent of their jobs. The big Texas markets were right behind along with Phoenix, Birmingham and Washington DC at 8 to 9 percent.
Temple Square, Salt Lake City, Utah, North America (Photo by Hoberman Collection/Universal Images … [+]
Universal Images Group via Getty Images
On the poor end, Detroit, Las Vegas and New York lost more than 20 percent of their jobs.
April was just the first month for which we have hard numbers; as time goes by this picture will get worse so we have to stay on top of it, but at some point each market will reach its own bottom and then we’ll have a true reading of how far it is from a ‘normal’ level of growth.
The speed with which jobs are then regained will be a third indicator investors can use to decide where and when to invest. This will be a drawn-out process and it’s not clear that every market will get back to the level of employment it had before the coronavirus struck.
But we can already make a guess about this: what types of jobs are most vulnerable to permanent lost because of how things will change?
We have some clues. Although the overall loss of jobs in April was 13 percent, only 2 percent were lost in the finance sector and only 4 percent in government. But 10 percent of manufacturing jobs were lost and a whopping 48 percent of jobs in tourism, hotels and restaurants.
Markets with a concentration of vulnerable jobs.
Content provided by Local Market Monitor, Inc.
Restaurants will change how they operate, local government budgets will be under huge strain for years, and other types of businesses will change too as the recession accelerates trends that have been underway for years. The retail sector will go on-line faster. Manufacturers will automate faster. More education will be on-line, and so will more healthcare. Everyone will try to do things with fewer people.
Some markets are more vulnerable to these changes than others. We can add up the numbers of jobs in each market that are most vulnerable to these larger forces and get a sense of the longer-term local growth prospects.
In a crude ranking, markets with low vulnerability include Richmond, Denver, Atlanta, Newark, Frederick County in Maryland, Raleigh, Dallas and Birmingham.
Markets with high vulnerability include Las Vegas, Grand Rapids, Orlando and Milwaukee.
These are useful ways to compare markets but they don’t give us final answers yet. It’s too early, we have too little data, too few facts. The important message in 2020 is to follow the data, in a few months we’ll have a lot more. Then investors will be able to form a complete picture of the best markets for investment.
Lastly, no matter where you choose to make an investment in rental property, you can minimize your risk by investing in the ‘favored price range’ – where the most renters are concentrated. That is essential at a time when both the high and low end of the rental market are under serious stress. Above the ‘favored price range’, demand may disappear altogether for a while, below the range a lot of renters will have financial difficulties. We can find the favored range in each local zip code by back-calculating Census data from actual renters.
Growth before the recession, job loss during the recession, the speed with which jobs come back, long-term job vulnerabilities, and the ‘favored price range’. These are tools every investor should take advantage of. You still have to make the final decision but these easy indicators can help make it the best one.