In only one of the 20 markets we analyzed for this review – Boston – did percent population over the past three years increase faster than the national rate. Most grew very slowly and in a good number of cases the population was flat or shrank.
In addition, the number of jobs in these markets in the past year increased at the average rate in only four. These are not growth markets, not even close. Stagnation is a better description.
Population and jobs are the strongest drivers of demand for housing, so how do you invest in markets where those drivers are absent? It’s not as though there’s no demand for housing here: home prices in some of these markets increased smartly in the past year.
Clearly, we have to assess low-growth markets in a different way than we would markets where people are pouring in. Even in high-growth markets it’s possible to make bad investments, the chances for success are just better. So, similarly, in low-growth markets it’s perfectly possible to make good investments, you just have to be more careful about it.
One way to be careful, of course, is to invest in the right location. These days that means closer to downtown, or near a college, hospital, or retail complex, or by a major transportation access point – a metro rail station or major highway intersection.
In those markets where home prices have recently been flat or down – Hartford, Fairfield County, Atlantic City, with New Haven, Camden and Trenton close behind, where home prices are well below the income price, and where the Home-Price/Rent ratio is low – you may be best off rehabbing a property in a favorable area. You can then either enter the upper-middle rent market – which is less affected by a poor economic climate – or just resell at a higher price.
In down markets like these it’s also a good idea to simply invest in an apartment building. Even though home prices may be flat, rents increase with inflation and local income and could give you a superior return down the road if the local economy picks up again. Just keep in mind that the location is key, and avoid renting in the bottom half of the market, that’s where economic distress can affect both your occupancy rate and your management costs. Low-end renting is a highly specialized field.
In markets with a high Home-Price/Rent ratio – Portland, Boston, the New York area, and Newark – the rental and single-family markets are disconnected. It’s very difficult to rent out an expensive single-family home because the number of potential renters with the necessary income is fairly small. Instead, investors can split a single-family home into several rental units, or just invest in apartment buildings. Rehabbing is also an option, but in these markets with low growth, the time and expense to rehab a property or to split one into rental units may not be worth the potential payoff.
The income price gives a final clue about what can be done in markets that remain under-priced almost 10 years after the big recession. Hartford, Fairfield County, Rochester, Syracuse and Camden are significantly under-priced and also have low home prices (Fairfield county splits into the expensive Greenwich-Stamford end and the in-expensive Bridgeport end). With the current economic situation poor and prices so low, you might take a flyer and risk short-term stagnation in exchange for a big payoff down the road. Again, find a property in a favorable location, do minimal rehab, rent into the upper half of the market – and just sit on this one without expectations for five years. Your downside is low, your eventual upside pretty good.
It’s easier to invest in markets that are growing, but people everywhere need a place to live. Within every market there are sub-markets with good potential. You have to work a little harder to find them, you need to think about different ways to invest, but even in the slow-growth Northeast there are plenty of possibilities.