A Tale of Two Cities: The Best of Markets, The Worst of Markets

Charles Dickens was no real estate investor, but his famous opening line certainly applies to today’s markets. A recent article on ZeroHedge highlighted a few major concerns in today’s real estate environment, which, if left unchecked, could spell trouble for investors. But those same issues could also give you an upper hand—so long as you’re informed and prepared.

The Bad News

Home prices in 80% of the nation’s primary markets are growing two times faster than their wages. In fact, wage growth has been tepid at best.

Just look at major U.S. cities like Portland, Dallas, Denver, and Los Angeles. Across the board, the growth in the cost of housing has risen 13%. In fact, 16 out of the 20 top metropolitan areas have average home costs that are double the median income. These markets, for example, are rising at 5.4% while wages rise at only 2.7%.

In San Francisco, Las Vegas, and Seattle, those home prices are even higher—10%, 11%, ad 14% respectively. That’s outpacing the income by as much as seven times.

So what does this mean for you? The markets are overheated. Be wary about investing in any of the top markets because they’re going to see some major corrections in the near future. Just think: it’s 10 years past the 2008 crash, and markets usually last 8–10 years. The housing cost-income disparity can’t be sustained for long without some major consequences, so if you’re an investor in a primary market, consider investing somewhere else.

The Good News

But don’t despair quite yet. This issue has some key benefits for investors, too. Millennials are struggling to buy homes at the current prices, so many are renting instead.

It’s a pattern that’s likely to stay for at least another decade. Millennials are drowning in student loan debt, and their wages aren’t high enough to receive a good loan. And, as this generation prioritizes life experiences like travel, they sacrifice big homes, preferring instead to rent smaller properties.

That’s a pretty big shift from the last generation, and fortunately, it works in the investor’s favor. This is a great time to become a landlord and expand your portfolio, especially if you make rental properties a focal point.

The Strategy

Pay attention to economic trends. According to the data, primary markets have a lot of risks. Instead, consider investing in tertiary markets that are less overheated. You can still make great money as a real estate investor so long as you’re watching the statistics.