California home prices have been on a marathon run for quite some time, but the Golden State is no longer the leader when it comes to skyrocketing appreciation. There are other hot markets where we as investors, can buy low, cash flow and watch your equity grow.
According to Zillow’s Real Estate Market Report home values increased 7.2% nationally over the last year. It says median home value hit $195,300, which is just a hair under an all-time high of $196,600 in 2007. But Zillow’s national numbers don’t tell you much about individual markets. If you want to find out where the hot markets are right now, don’t look in California. Look south.
Three of the ten fastest appreciating markets are in Florida. Nashville, Tennessee is another hot southern market, along with Dallas. And most of the top ten markets are hit double-digit price appreciation last year.
Zillow Chief Economist Dr. Svenja Gudell says of the California fixation: “We spend a lot of time focusing on the West Coast, but power-house markets exist throughout the country.” He says: “Florida and Texas home values have grown quite a bit over the past several years, stealing the spotlight from slower moving markets like San Francisco, San Jose, and Los Angeles.”
Nashville is at the top of the list with a 12.4% increase in home values this last January. Portland, Oregon, is second with 12.1% appreciation. Prices in Tampa, Florida, were up 11.9%. Dallas prices rose 11.2%. Orlando, Florida, is fifth on the list with a 10.8% increase. Seattle, Washington, is next at 10.7%. Detroit, Michigan, prices rose 10% in January. Las Vegas, Nevada, saw a 9.8% increase. Denver, Colorado, was 9.3%. And Miami, Florida, prices were up 9.2%.
This price acceleration is about half the rate of acceleration seen in 2014 because prices were still well under market value after the Great Recession. We’re unlikely to see those rock bottom prices again unless we have another financial crisis. So what’s important to consider now is where you can get the most bang for your buck — and for investors, where you can buy cash-flowing rentals that may also give home value appreciation.
Remember, when we look at home price appreciation, we are looking at the past. There’s no guarantee that the trend will continue, especially if prices have risen beyond affordability levels. This is the biggest mistake new investors make – using past data to predict the future.
You must look at other metrics to determine the future growth of a market.
First and foremost is affordability. Can the average person afford the property? If not, price gains may slow down, like they have in San Francisco, New York City and Miami.
Job growth and population growth are also highly important metrics, along with city redevelopment plans and demographic shifts. As investors, we need to also look at rental demand and yields.
If a market has increased in value, that probably means that cash flows have compressed. And if cash flows are below 4%, you are taking a risk – betting only on future appreciation…unless you have plans to force appreciation, meaning you fix the property up or expand it somehow and add value through improvements.
Our investor group bought an apartment in Mountain View across from Google with just a 2% cap rate. But our plan was to increase density from 200 units to over 700, and the city is on board. Otherwise, we would never have accepted such a low cap rate.
So let’s look at areas where rents are up. They’ve risen 1.4% nationally over the past year, according to Zillow’s Rent Index. It shows a median rent of $1,404 a month across all metros and rentals. Cities with the highest rent appreciation have been Seattle; Portland, Oregon; and Sacramento. But again, remember, this doesn’t mean you’re getting the highest yields in these areas. Additionally, if rents have passed affordability levels, we could see a softening there as well.
The other side to the “hot market” coin is “inventory” and whether you can get your hands on some of these great deals. Zillow says the nationwide inventory of homes has fallen year-over-year in each of the past 24 months. This last January it was down 2.9% from the year before. That’s for homes of all prices. If you break it down into entry-level homes versus top-tier homes, there was a 4.6% drop in those less expensive homes, and a 1.3% drop for the pricey ones.
In January, Zillow says the metros with the biggest drops in inventory were Minneapolis, Detroit, and Cincinnati. That means we can likely expect home prices to rise in those area as long as demand stays strong.
Zillow says the cities with the biggest annual inventory gains were Las Vegas, Austin, and Miami. This generally means we could see a softening of values in those areas.
According to ONE Sotheby’s International Realty, sellers have been expecting too much out of the market in Miami. The brokerage released it’s 2017 Trend Report, and says luxury home sellers were raising prices just as sales slowed down – and now there’s a glut of waterfront homes with “for sale” signs in Miami.
Homes in the 1-5 million dollar range are at the most risk of low performance in the 2017 market. Among those homes, the report says inventory is up 36% compared to 2012 and the number of transactions is down 9%. Luxury homes in the five to 10-million dollar range are also experiencing a 25% increase in inventory although prices are down just slightly.
Unlike those pricier homes, the report says the market for less expensive non-waterfront single-family homes is thriving. It says there’s been a 9% growth in pricing for homes under one-million dollars.
As for Las Vegas, the Outback REIA told us that prices there have also gone above affordability levels. Plus, inventory gains could be due to homeowners with previously underwater loans, finally getting enough equity to put those homes on the market, and lenders may finally be releasing more of that “shadow inventory.”
Zillow has a colorful chart that shows you the top ten fastest appreciating markets for the last four years. You can also learn more about the areas we believe have the best cash flow today, and the greatest chance of appreciation in the future by clicking on Invest in the main menu.