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The most striking feature in markets in the Midwest is that home prices in most of them are still below the level where local incomes say they should be. For an investor, this means two things. First, you can still find bargains in these markets. Second, demand for housing—at least until recently—has not been very strong.
The lack of a rebound in this area of the country after 2008 is largely due to the types of local economic growth that prevailed before that. The recession came on top of a slow decline in manufacturing that had already sapped economic and population growth in much of the region.
And the availability of an educated but low-cost labor force had encouraged the growth of big financial operations in Des Moines, Minneapolis, Omaha, Sioux Falls and Green Bay.
Manufacturing still has a large role in Fayetteville (Walmart suppliers), Davenport, Peoria (Caterpillar), Rockford, Gary, Fort Wayne, South Bend, Wichita, Milwaukee and Green Bay – which makes these markets a bit riskier to invest in. And the markets with a large finance sector are also riskier because computers are doing more and more of the work.
Despite these structural problems, growth is now returning to many Midwest markets – especially those that function as regional centers – because of the expansion of jobs in the healthcare and business services sectors. As elsewhere in the country, these services are becoming more concentrated in large urban centers, creating opportunities for investors in rental housing.
An unusual feature for investors to contend with is that many Midwest markets have an agricultural past, with manufacturing later laid on top of that. As land was readily available during their growth, they tend to be spread out. This both produces low home prices (because land isn’t as scarce) and more difficulty for investors to decide exactly where within a market they want to invest—location, location, location.
Among the 50 zip code areas in Omaha, for example, home prices vary a lot and demand for housing in recent years has not at all been uniform. The best way to deal with this problem is to stick close to medical centers, colleges, government office complexes and rejuvenated downtown shopping areas.
These generalities aside, let’s get more specific about some markets.
Established Demand
Fort Wayne, Kansas City, Indianapolis, Green Bay, Springfield, Fayetteville, Gary and South Bend.
In these markets, home prices were up smartly in the past year, indicating good demand not just for single-family homes but for rentals as well. With prices still well below the income level and job growth above-average, demand is likely to keep pushing prices higher. Gary and South Bend are at the bottom of this list because their job growth has been less reliable.
Investors should move fairly quickly into these markets before the bargains are gone. Straight single-family rentals with minor improvements are the best bet.
Local Market Monitor Inc.
Local Market Monitor, Inc.
Growing Demand
Des Moines, Omaha, Lake County-Kenosha County, Sioux Falls, Minneapolis, Madison.
These markets are showing good job growth but only moderate increases in demand so far. Apartments are a good bet in Lake County-Kenosha County and Minneapolis because of their higher density and higher rents. Because of their dependence on the finance sector, most of these markets are slightly riskier, so investors should be very careful to find properties in the middle of the renter pool – not at the high end.
Uncertain Demand
Little Rock, Wichita, Davenport, St. Louis, Chicago, Rockford, Milwaukee, Fargo, Peoria.
In these markets either demand or job growth are weak, or both. In many of them home prices are also low, which can tempt investors to buy a cheap property and rent it out for low rents without spending another dime. But renting at the low end is a specialty most investors should avoid. In uncertain markets it’s better to find the safest parts of the market, both by location and renter range, and then rehab an inexpensive property into the center of that rental range. It’s more work but will give you better returns for less risk.
Wrap-Up
These markets have been sleeping, now some of them are waking up. You can’t just ride a surge in demand, you have to do some extra work to find the best opportunities. But you’ll have very little competition and you’ll be able to find some great deals.