Seen from above, the economy is doing great. For each of the last two quarters, GPD grew at an annual rate of 3% ― that’s a lot. Exports are growing. The stock market is high. Unemployment is low. The Fed makes optimistic statements about the future and may let interest rates rise.
On the ground, though, there’s less euphoria. In a third of the 320 markets my company Local Market Monitor covers, the number of jobs increased by less than 1% in the past year. In half of those 320 markets, income grew less than inflation. In two-thirds of them, home prices have not fully recovered from the last recession.
How can there be such a mismatch, and what does it mean for real estate and investing?
The most important development of the last several decades is the concentration of economic activity. The logic of corporate enterprise pushes companies to grow as much as possible, which sophisticated technology now facilitates. At the same time, companies are more reliant on the infrastructure and outsourced services that exist in urban centers. The result is a concentration of economic output in a relatively small number of local markets. Just 50 metro areas in the U.S. now produce 75% of total GDP.
It may well be that we’re on track to have two kinds of real estate markets: those closely linked to the supply and demand cycles of the national economy and those where the local economy is affected more by social characteristics than by production output. Sure, in the long term, all these markets are connected, but in the time-frame of real estate investors, the differences may be the key to good investment strategies.
The investment significance for markets that are closely linked to the national economy is that demand and supply are often out of sync, leading to classic home price and rent cycles that may last just a few years at a time. These markets present opportunities for bigger returns but also have higher risk; investors need to have specific entry and exit plans and need to pay close attention to ongoing economic developments.
Local Market Monitor shows data for 25 markets that have a high GDP per person ― one way to identify markets closely linked to the national economy.
Note that in these markets there is in general a strong relationship between the amount of job growth and the increase in home prices. Note also that those with a big increase in GDP per person had especially strong increases in home prices. Also note that markets with a big financial sector (Fairfield County, Des Moines, Hartford) or energy sector (Houston, Tulsa) can run on a different cycle than the national economy.
Ingo Winzer is the President of Local Market Monitor, Inc., a North Carolina based residential real estate forecast company that provides MSA, county and zip code analysis nationwide to investors.