How To Identify Up and Coming Real Estate Markets
As the real estate market continuously ebbs and flows, investors may at times need to broaden their search to additional markets across the country. While some areas are currently experiencing high-demand and inventory shortages, like San Jose, CA, which has the highest average home price at $1.1M, or Orlando, FL, where homes are currently selling for 2-3x their asking price, other areas remain stagnant in their growth with low-demand and excess inventory. However, there are always markets in between that are on the rise, and this is where investors can find their potential pot of gold.
Investors who have a keen eye for market trends have the advantage of predicting where the next inventory boom will occur, allowing them to buy low and sell high. Unfortunately, most investors don’t know what indicators to look for when determining if an area is on the brink of skyrocketing. In order to expand your business into the right areas, at the right time, we’ve gathered a list of the best indicators to help you identify a real estate market that has growth potential.
Traditional Indicators To Know
Possibly the easiest way to tell if an area is on the rise is if you notice a large migration of people moving there. If a market’s population is growing, they’ll require more inventory to meet the increased demand, setting investors up for a prime opportunity to rehab a home to sell or rent in that market.
You can keep track of the year over year growth of different cities throughout the U.S. Census Bureau’s website. Additionally, you can look at the fastest-growing city or town in each state using their interactive map.
The Covid-19 pandemic catalyzed an unprecedented relocation of households throughout the country, often to be closer to family, or in search of a better work-life balance. Climate-related migration and relative cost of living concerns are also contributing to “the great reshuffle.” Redfin has a nifty migration analysis tool to see where people are moving too and from.
Employment Growth and Economic Drivers
Continuing along those lines, employment growth (or wage growth), is a proactive way to predict if a local real estate market is primed to accelerate. In fact, employment growth is often a leading indicator to population growth. Savvy investors can directionally predict employment growth by monitoring job postings in an area.
Additionally, understanding the types of jobs and industries that might be growing in a target market will give you great insight into the market’s potential in the near and medium term as well as its stability and resiliency long term.
Does this market have a diverse economy in industries that have staying power and tend to be less cyclical? What industries/sectors are increasing year-over-year and which are declining? Understanding these economic drivers will give great insight not only to a market’s potential upside, but also the downside in a recession or contraction cycle.
Rising Home Sales
Keeping an eye on the health of different markets is essential to understanding upcoming market trends. A steady increase in monthly home sales within a specified area can potentially point to an emerging area. On the other hand, a decrease in home sales can indicate that a regressive trend is on the horizon.
The National Association of Realtors (NAR), maintains a regional Existing Home Sales report that breaks down the sales trends for the 4 major regions: West, South, Northeast, and Midwest.
Rising Rental Rates
In a similar fashion, rents that are steadily climbing YoY can indicate healthy housing demand. If local vacancy rates are high, it’s likely there aren’t many people looking to move to that area. However, if they’ve been decreasing at a steady rate for the past few months, that could be an indicator of a trend you may be able to take advantage of.
Investors who are planning on utilizing a Rehab & Rent strategy, such as the BRRRR Method, want to be sure to look at Zillow’s Rent Index to keep track of this metric. Not only can you use this information to identify a potential hot area, but it will also help inform what you can charge for rent should you choose to go that route.
Another key indicator is if there are currently developmental improvements being made to the area. Improvements in infrastructure could be one, but also look to see if new shopping and entertainment centers are being built, or if schools are being refurbished, this could be a sign of population growth in the area.
Additionally, if new homes are being built on undeveloped land, or older homes are being refurbished, other real estate professionals have likely seen trends that make them think homes in that area economically beneficial to add to their portfolio. It’s worth taking the time to do some research about what is going on and being developed in these areas to uncover a potentially lucrative deal.
Other Signs To Watch For
Real estate investors need to have a full understanding of the areas that they’re working in. That’s why doing your due diligence is so important. In addition to looking at population and rate trends, you can also look to see if the type of homes you’re looking to add to the community would make sense in that area. What can the average family in this community afford? Comparing median income growth to housing costs will allow you to see if home prices align with the economics of the community itself, as well as your investment strategy.
When looking for new markets to invest in, it’s important to keep an eye on what is changing in that particular area. A big indicator could be if a major corporation is opening a new office or headquarters there. Companies will have paid hundreds of thousands of dollars to ensure whatever area they’re going to put a new facility in will be worth their investment. On the flip side, a market that large employers are fleeing will challenge any investment strategy.
For example – when Tesla announced it would build a Giga-factory and relocate a large portion of its operations to Austin, an opportunity was created for local real estate entrepreneurs. Quickly acquiring and renovating nearby homes at an attractive basis, and then targeting the inevitable influx of well-paid Tesla employees as the buyer or tenant – turned out to be a fantastic business plan.
Speed of Sales
It’s important to look at an area’s overall supply of houses to complete your overall picture of the health and future of the housing market there. Most economists agree that a 5-7 month supply indicates a balanced real estate market. However, more than that, can lead to a decrease in average home prices, creating a Buyer’s market. The laws of supply and demand could quickly turn this area into a Seller’s market, so it’s imperative to get in before the tides turn in order to cash in on a good deal.
On top of that, look at how quickly homes are being sold in the area. If most houses are sitting on the market for 3+ months, that’s a pretty big indicator that people are not looking to buy there. However, if homes are selling within the first 30 days, that points to a strong demand that you may want to take advantage of quickly. Not only does this indicate that people are looking in the area, but that prices of homes could soon be increasing.
Barriers to Entry
Certain geographies have barriers to entry that make it hard for new supply to be added to the real estate market. These barriers are often either political (hard to get required approvals), or physical (surrounded by mountains, water, etc.). It is important to take this into consideration when formulating your investment thesis. If you have an opportunity to acquire property in a supply-constrained market, history suggests that over time your appreciation returns and rent growth will be higher than in low-barrier to entry markets (all else equals.
For example, it is no surprise that San Francisco is one of the most expensive real estate markets in the country – it’s both land-constrained AND it is extremely difficult to develop new properties on account of local politics. Compare that to Houston – where there is no zoning and practically unlimited land to develop – real estate is much more affordable.
There are many factors that can indicate whether or not an area is up and coming, but none of them can tell you the future of that area with 100% certainty. The secret to taking advantage of these opportunities when they arise is to act swiftly. Completing your due diligence is important, so you can make your best educated guesses on where to invest your money, but ultimately it would be a disservice to your business to overthink in order to time your purchases perfectly with a market.
At the end of the day, whether your plan is to fix & flip or rehab & rent, you need to buy in markets that you believe in and feel strongly about improving. At Backflip, our goal has always been to empower real estate entrepreneurs to reinvigorate their neighborhoods and communities. After completing their market research and identifying an area in which they want to invest, many of our members use our suite of tools to identify the right homes to add to their portfolio and to inform their investing strategy. Regardless of your investment plan, Backflip can help you identify a strong deal so you can set yourself up for success as you work to expand your business into new markets.