With housing prices rising but wages stagnant, 2016 is likely to be a year of worsening affordability for homebuyers, especially low- and middle-income earners, according to Zillow, a real estate data-tracking company. That’s bad news for many people hoping to buy a home for the first time. But for investors looking to put their money into rental properties, these economic conditions point to continued strength in that market.
To find out where investors might get the best bang for their housing buck, and where aspiring homeowners have the best prospects of making an economically sound purchase, 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. The result is our list of 2016′s Best Buy Cities—the top 20 housing markets to invest in this year.
The clear takeaway: there are good values to be had in Florida, which placed seven cities on our list.
To come up with these cities, Local Market Monitor screened the 100 largest Metropolitan Statistical Area and Divisions (geographical designations used by the U.S. Census Bureau to delineate a core city and its surrounding suburbs), all with populations of at least 600,000, for characteristics that make for good investments. Each of our Best Buy Cities boasts healthy job growth, strong population growth, and anticipated home price appreciation. The majority of the cities are still considered undervalued; home prices in seven of the 100 cities are now a bit overheated–though not enough to make them risky.
To assess whether home prices are over- or undervalued, Local Market Monitor crunches local income and housing data to come up with an “Income Price,” which represents what the average home price for a particular market would be without distortions in the market (such as the recent housing crash, or heavy investor speculation). The idea is that there’s a relatively stable relationship between local home prices and local salaries; investors who buy when homes are priced below the Income Price are more likely to make a good return.
This year we favored cities with the strongest employment growth in compiling our ranking. Normally local economic health is the basis for housing supply and demand, says Ingo Winzer, founder and president of Local Market Monitor, but the financial crash and foreclosure crisis upended the usual patterns.
Now that the economy has recovered, “We’re in a time period where economic growth has taken over again,” Winzer said.
Both our No.1 metro area, Grand Rapids, Mich., and Tampa, Fla. (No. 14), boast a healthy 3.1% three-year population growth rate, according to the latest Census data, indicating that people are moving there at a higher rate than the national average (2.3%, 2011-2014). But employment in greater Grand Rapids expanded by 3.9% in the 12 months to November, according to the Bureau of Labor Statistics, the highest rate among the 100 metro areas we examined, compared to a 2.6% clip in Tampa. As a result, Grand Rapids gets a higher ranking.
The Michigan city boasts a diverse economy: In addition to its historic roots in furniture-making (these days for Steelcase, Haworth, and Herman Miller), Grand Rapids has a “Medical Mile” of medical suppliers, as well firms specializing in aerospace and advanced manufacturing. A couple hundred miles west of Detroit, greater Grand Rapids is also a major supplier to the auto industry. As we came out of the last recession Grand Rapids was really propelled by the manufacturing side,” says Paul Iseley, economics professor at the Seidman College of Business at Grand Valley State University. “Now what we’re seeing is the second edge of that, moving into services.”
In second place on our list is Orlando, followed by six other cities in the Sunshine State, including Fort Lauderdale (No. 8) and Cape Coral (No. 10). Among them, average home prices are highest in West Palm Beach (No. 19), at $285,000, and lowest in Tampa (No. 14), at $193,000, but have been accelerating at a rate of 9% to 14% in all the Florida cities.
Why is Florida, of all places, dominating the list? “The Florida situation surprised me,” admits Winzer. But in light of the national economic recovery, Florida’s rise makes a lot of sense. Because it attracts retirees, second-home buyers, and investors, the Sunshine State’s housing market is subject to more volatility than other markets. With would-be retirees and vacationers staying away during the downturn, housing prices tumbled dramatically. “Since the national economy has stabilized and is growing again, the factors that prompt people to go to Florida have recovered,” Winzer said. As retirees and vacationers return, they need services, in turn creating a steady stream of jobs, which leads to a steady supply of renters. Last year Florida added nearly a quarter-million jobs, Florida TaxWatch reports.
Texas is the state with the second-greatest number of cities on the Best Buy list, three: San Antonio (No. 3), where homes average $201,000; Dallas (No. 6), where home prices average $211,000; and Austin (No. 7), $281,000. While the rest of the country was in the depths of the recession, Texas experienced only a shallow one, and bounced back with force. The energy boom helped fuel job growth; even with gas prices now way down and the industry hemorrhaging some 200,000 jobs, these three Texas metros are doing well overall thanks to their diversified economies. The Gulf Coast has welcomed a boom in petrochemical construction, and the state is seeing growth in leisure and hospitality, both activities reportedly fueled by lower gas prices. Austin is welcoming growth in high tech. Dallas is welcoming the relocation of Toyota, State Farm Insurance, and Liberty Mutual Insurance. San Antonio has financial firms and data centers. Year-over-year job growth is strong (San Antonio: 3.7%; Dallas: 3.5%; Austin: 3.3%) and people continue to move to the Lone Star State (three-year growth rates for San Antonio: 6.1%; Dallas: 6.2%; Austin: 9%), meaning it is an area flush with a pool of renters. Housing prices are rising but compared to the rest of the nation, still relatively cheap. And there continues to be a shortage of housing supply, meaning prices are likely to keep on rising (three-year home price growth projections for San Antonio: 26%; Dallas: 33%; Austin: 27%). Though only three Texas cities grace this year’s list, “Houston and Fort Worth would easily be in the next 10,” Winzer said.
Winzer predicts that it will still be a while before Texas prices reach the point where these metro areas are no longer a good investment—by his estimate, when they are overpriced by about 20%. On that note, the Golden State is notably absent from our Best Buy List (last year Sacramento made the list). “San Francisco and Los Angeles are overpriced already: prices are 30% higher than what they should be,” Winzer said. “They are dangerous to the investor.” A safer bet: Indianapolis (No. 11) or top-ranked Grand Rapids.
Eleven of the cities on our list this year also made the list last year; among the nine new cities are Seattle (No. 9), Nashville (No. 13), and Madison, Wisc. (No. 17).