Which U.S. Market Offers Maximum Capital Appreciation Over the Next Decade?
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I came across this question on a real estate forum and found it excellent. While no one can predict the future, in this post I'll outline the characteristics of cities that are likely to experience rapid, sustained appreciation.
Before I continue, home prices reflect the balance (or imbalance) between sellers (supply) and buyers (demand). When sellers exceed buyers, prices decline until the market reaches equilibrium. When buyers outnumber sellers, prices rise until supply and demand become relatively balanced.
Demand is largely driven by population change. In cities with declining populations, demand is low, resulting in more sellers than buyers, causing prices to decline or, at best, stagnate. When there is significant and sustained population growth, prices rise because demand is high. So the first city criterion is significant and sustained population growth. Source: Wikipedia metro population data
Why do people move to a city? In most cases, people move to a city for jobs. However, most jobs are relatively short-lived. Companies in the US only last on average 10 to 18 years. So, on a long-term hold, your tenants will have to find replacement jobs more than once. If new companies don't move into the city and create replacement jobs, the only available jobs will be lower-paying service sector jobs. When this happens, area incomes fall. City services are funded by sales and property taxes. As city incomes fall, city revenues decline. With declining revenues, the city has no option but to cut back on services. This results in increasing crime and deteriorating schools. When this occurs, people with sufficient income will relocate to cities with better economic conditions, causing a further decline in city revenues. This creates a financial death spiral from which few cities have ever recovered.
What Attracts Jobs?
When companies select locations for new operations, they have numerous options. What characteristics make a city attractive to these businesses?
Pro-business environment:
Companies are in the business of making money, not fighting local legislation. This is why so many companies are leaving California. It's simply too expensive and time-consuming to battle government regulations while competing with other companies in pro-business environments. One website I found that ranks cities for ease of doing business is
Doing Business in North America
Also, Google search using phrases like the following:
- [City Name] pro-business environment
- [City Name] tax incentives for businesses
- [City Name] ease of doing business ranking
- [City Name] business regulations and permits
- [City Name] economic development initiatives
- [City Name] chamber of commerce business support
Low crime: Companies are unlikely to choose any high crime city. Do not consider investing in any city on this list by CBS News.
Minimum population size: Companies establishing operations look for cities with substantial infrastructure and population bases. This includes access to airports, interstate highways, and a large talent pool for hiring. These resources are typically found only in metropolitan areas with populations exceeding 1 million people. Wikipedia metro population data
Low operating costs: Companies don't choose cities with high operating costs. Between various locations, you could have a 20% difference in operating costs. A good barometer for operating costs is insurance and corporate/property tax rates.
Low risk of natural disaster: Natural disasters can devastate your property and the city, leading to job losses and the closure of businesses. This forces people to immediately relocate. While insurance might cover the reconstruction of your property, the community's recovery could take years or, in some cases, never occur. Meanwhile, your expenses, like debt service, taxes, insurance, and maintenance, continue. Google search for [City Name] natural disaster risk. You can also compare homeowners' insurance costs. The higher the cost, the higher the probability of a natural disaster occurring. Sources:
Rising Personal Income
Just because there are plenty of jobs, it doesn't automatically translate into higher home prices. Only well-paying jobs enable people to bid higher and higher prices on available homes, creating appreciation. The St. Louis Federal Reserve (link) is a good source for researching a city's personal income trends. Below is the chart for Clark County (Las Vegas metro).
Bonus
Limited room for expansion. In other words, expensive land. A great example is Las Vegas. It is surrounded by federal and conservation lands and has very limited land left available. When supply is limited and demand (population) continues to grow, the odds are very good that appreciation will be strong. Best source: Google Earth Timelapse. Here is Las Vegas aerial time lapse and you can enter the name of any city under consideration. Below is a 2022 aerial view showing land usage in the metro Las Vegas valley.
If you select a city that meets the above requirements, you'll have a high probability of rapid, sustained appreciation.
I will be on a cruise ship next week, and may take a break from blogging:). Hope you are also enjoying your summer and I will “see” you again in two weeks.
