It used to be that people traveled to the Southwest for their health – for the dry, fresh air – or to retire. Now they move there for the jobs.
Take a look at the table and you’ll see that the growth of jobs in the past year, in all but a few of the markets, is well over the national average rate of 1.8 percent. We can expect this growth to continue. Excluding New Mexico, the Southwest states have the fastest population growth in the country.
The original economies of many Southwest markets – minerals, cattle ranching, agriculture – long ago gave way to broader developments, like oil and gas extraction, the migration of industries out of California, the expansion of federal and state institutions (like universities), and the growth of tourism.
The big markets, like Denver, Salt Lake City, Phoenix and Albuquerque, are now major healthcare centers, and provide business services to a regional population that expands easily into what is still largely empty land.
As in Texas and Florida, the high rate of growth provides good opportunities for real estate investors, but growth itself can produce problems when rising demand for housing outstrips the local supply. Accordingly, the best way to invest in our 20 markets depends very much on where they are in the growth cycle.
I’ve grouped them into three different types of investment opportunities using data from my company Local Market Monitor, Inc..
Over-Priced Markets
Markets are over-priced when the average home price is well above the local ‘income’ price. This happens when prices rise faster than incomes and means that home buying is being driven by a smaller and smaller group of high-income buyers, often abetted by speculators.
The imbalance starts to become a problem when prices are around 20 percent higher than the ‘income’ price, which is the case in six of our markets. Serious over-pricing starts at 40 percent and right before the 2008 recession some markets were over-priced more then 50 percent.
Note that job growth is still good in all six markets, although it’s recently slowed in Denver, Fort Collins and Salt Lake City. And prices are still rising at a good clip. This means that the boom in prices isn’t over yet even though the risk is increasing.
In these markets, you want to make an investment with either a very short or a very long time horizon – one that won’t be affected by a bust. There are good opportunities but you must act defensively.
Don’t hold too many properties at once. Don’t buy properties you have to rent out higher than about 25 percent more than the average rent; above that level you won’t find renters when a bust happens. Don’t buy properties that need extensive rehab, or that you plan to split into rental units – that will take too long. Flipping is fine this year, but the audience of buyers will get smaller as time goes by.
Booming Markets
This category includes markets that are not yet over-priced but where prices are rising rapidly. With the exception of Ogden, there’s a good reason why demand for housing is high – the job situation is very good. Because they’re not over-priced, you can make almost any type of investment without worrying too much about a bust – except in Las Vegas, where you should only invest if you have a strong taste for adventure.
Note that these markets could be over-priced very soon, so you need to be careful not to overpay for a property – price according to the rent you can charge, and don’t go more than 25 percent above the average rent.
I would concentrate my attentions on Colorado Springs and Provo, they have the strongest economy and a ways to go before being over-priced.
Promising Markets
The other eight markets on our list – with the exception of Albuquerque – have had pretty good demand for housing, as shown by the increase in home prices in the past year. St. George and Prescott could easily be in the ‘Booming Markets’ group, where you need to be a bit careful.
Despite the slower growth, I’m attracted to Albuquerque because of the larger number of renters, also the case in Tucson where you should look for property near the university (but rent to faculty and staff, not students).
The strength of the local economy is very important and can be volatile, which is why I’d stick to the larger markets for safety. That said, the smaller markets will probably grow the fastest, providing the best investment opportunities.
Wrap-Up
Fast growth, big opportunities, but high growth also leads to higher risk. Tailor your investment to the amount of risk you can stand.