2019 will be much like 2018 – but with a bit more anxiety.
The fundamental forces that have driven rents and home prices higher – more demand for housing than supply – will continue unabated. There just hasn’t been enough construction over the last years to keep up with the demand that is increasingly concentrated in big cities (but not all of them). And – good news – in these big cities the demand is mainly for rentals.
The anxiety comes from two possibilities – that a slower economy will erode the demand for more housing – and that prices are already so high that investors won’t get enough of a return to justify new investments. In short, maybe all the good deals are gone?
My own view is that investors do indeed have to approach some markets with more caution in the new year, but that there are still plenty of opportunities available. It is important in 2019 to pay closer attention to the stats in local markets.
Are prices too high? See how much home prices are above the ‘income’ price, a calculated value. And look at the ‘target rent range’ – if the monthly rent you’ll need to charge is well above that range, you’ll find fewer renters who can afford it.
Las Vegas – Not only is job growth high, it’s better than it was six months ago. But this is still a one-industry town and it was hit hard during the last recession, so caution is already in order. Furthermore, the 18 percent jump in home prices in the last year is too high for comfort. Although prices are only 13 percent above the ‘income’ price, at this rate they’ll soon be above the 25 percent level where a market becomes over-priced. Then we could easily see a bubble. For that reason, investors should stick with apartments – which are not as volatile – or properties with rents not much higher than the ‘target rent range’ – if prices eventually do bust, you want to be sure you’ll find renters.
Atlanta – The local economy is growing well, demand for housing is up, and home prices are just about at the ‘income’ level. A good opportunity for investors. Apartments, single-family rentals, and splits into multiple units are all good options.
Seattle – As in San Francisco, the large number of tech workers is a liability if a recession happens; they’ll move elsewhere. Right now the local economy is very strong, demand for housing is high, and home prices are already very high. Apartments are the best bet, or single-family splits.
Orlando – The strongest local economy in this group. Most new jobs go to workers who rent (because their pay is modest). The tourism industry in this area had a quick recovery from the last recession. Demand for housing is strong but home prices are still moderate. This is a good opportunity for all types of investments.
Denver – Very similar to Seattle, with a large number of tech workers and home prices that are already high. The local economy is still strong but could be slowing this year. Single-family rentals are probably not a good option, their rents to far above the ‘target rent range’. Single-family splits are a possibility, but they could hit the market just as it peaks, so I think apartments are a better option.
Nashville – The local economy is growing at a slower pace, but demand for housing is still strong and home prices very reasonable. Single-family rentals are a better choice than splits because of the flexibility if the economy slows.
Phoenix – A very strong local economy, good demand for housing, but the market is slightly over-priced. Apartments and single-family splits are the best bets, but some single-family rentals could work if the price is right.
Miami – The local economy is strong right now, but can be volatile, so I’m not sure the strength will continue. Demand for housing is good but home prices have been driven too high by foreign investors, creating an unstable market. Apartments are the best choice; upgrades of low-cost homes are also a possibility but difficult to manage unless you live there.
Detroit – The long bust and recovery seem to be nearing a balance point, with demand for housing now good but the economy growing at a slow pace. In this type of uncertain situation, single-family rentals give the most flexibility and apartments are a good option if rents can fall within the ‘target rent range’.
Los Angeles – Uncertainty is also the situation in LA, with a slower local economy but housing demand still strong. With prices high, apartments or single-family splits are the best bet.
Charlotte – Even though the local economy is still very good, the concentration of jobs in banking is a liability in a recession. Single-family rentals are a good option because of the flexibility. Apartments are also a good bet.
Dallas – The local economy is strong, demand for housing is good, but home prices are getting on the high side. Single-family splits or apartments are therefore the best bets, but other options are also good for the long term. With a mixture of finance, tech, and business jobs, the local economy has very shallow recessions.
Minneapolis – The local economy has been running at a modest level but demand for housing has been good. With home prices close to the income price, all investment options are open.
Philadelphia – The same is true in Philly, where the local economy is a bit more volatile. In markets like this, where job growth is running parallel to the national average and is now on the slower side, investors should be careful to find investments with rents in the ‘target rent range’. These markets will easily be pulled down if a recession happens and high-rent properties will be especially vulnerable.
New York and Washington – In these large markets, demand for housing is moderate and recovery from recession is always prompt, so they’re good long-term bets for investment – but returns will also be moderate. Apartments are probably the best investment option because of the large workforce with moderate income.
Cleveland, St. Louis and Chicago – With moderate demand for housing and slow or volatile job growth, these markets have still not recovered from the last recession and home prices are well below the ‘income’ price. This means that single-family rentals are a good bet but the short-term returns will be modest. Downtown apartments are the safest investment.
Summing it Up
A recession is not on the horizon yet, but investors have to prepare for an economic slowdown in the next few years. That means avoiding properties with rents well above what we determined as the ‘target rent range’ and – in the over-priced markets – to either favor apartments or properties that can most easily be resold. I expect home prices to keep rising this year, but at a slower rate after that.
All of these markets still provide good investment opportunities – although Las Vegas is best left to speculators with a strong stomach – but investors have to pay greater attention to the risks than they did in 2018.