With the housing market stabilizing and last year’s dramatic price increases behind us (on a national basis, at least), it’s not as easy to quickly flip homes for a profit. Instead, now might be a good time to think about buying housing to hold for the long-term.
Whether you’re an investor looking to pick up a few rental properties or a young professional interested in purchasing a first home, there are plenty of places where housing should be a pretty safe bet. The key is to buy in cities with strong job growth that people are moving to, so that the stock of potential tenants for would-be landlords is abundant. We teamed up with Local Market Monitor, a North Carolina-based data company that tracks home prices and economic factors in more than 300 housing markets, to find 2015’s Best Buy Cities—the top 20 housing markets to invest in this year.
Local Market Monitor screened the 105 largest Metropolitan Statistical Areas (a geographical designation used by the U.S. Census Bureau that generally includes a core city and its surrounding suburbs), all with populations of at least 550,000. Each of our Best Buy Cities has strong population and jobs growth, and relatively low home prices. In most—but not all—of the cities, homes are still undervalued, by Local Market Monitor’s reckoning. (Last year, the average home values in every single city on our Best Buy list were considered under market.) This year four cities have reached the point where prices are a slight bit overheated–Salt Lake City, West Palm Beach, Denver, and Austin–though given their fundamentals, they’re still a pretty safe bet.
To gauge whether homes in a particular market are over- or undervalued, Local Market Monitor calculates what it calls the “Equilibrium Home Price,” or the “Income Price.” Essentially, this measure attempts to capture what the average home price for a particular market would be absent speculation and distortions (like the housing crash). This Income Price corresponds to the average income for the area over a multi-year period. “In every market there’s a relatively fixed relationship between home prices and income,” says Winzer. “When prices go above that level, that’s really when markets are overpriced. In this strong real estate recession, prices have gone under this income price.” When homes are under the equilibrium or income price, investors can feel fairly confident that they’ll make a good return.
With the recovery getting long in the tooth, there are fewer markets that are undervalued. “Getting a good deal is less likely, frankly,” says Winzer. “But in these markets you’re getting a strong rental stream. So now economic growth is relatively more important.”
The cities on our list are places where opportunities are increasing–and so are their populations. While our top 20 could all offer good opportunities for investment, we favored those with the strongest population growth, which should promise a steady supply of renters. For example, both booming Austin, Nevada (No. 1), and Grand Rapids, Mich. (No. 20), boast 3.6% and 3.7% annual job growth rates, respectively, according to the latest figures from the Bureau of Labor Statistics—both beating the 2% national average. However, the Austin metro area’s population expanded by an impressive 8.9% between 2010 and 2013, while Grand Rapids’ grew at a slower 2.8% clip. As a result, Austin gets a higher ranking. (On average for markets across the nation, population growth has been relatively flat at less than 2% for the three-year period, according to U.S. Census data. Thus, allthe Best Buy Cities are faring better than the national average.)
The downside of strong population growth–at least for investors just getting into the market–is more rapidly rising home prices. The average home price in Austin is now about 8% over the income price for the area, whereas average home values in Grand Rapids are still 23% under what LMM pegs as the equilibrium home price. “Expensive markets are bad place to invest in single-family homes,” says Winzer. “I don’t see San Francisco in there ever.”