When it comes to balancing risk and reward in real estate, cities in the Southern half of the country look to be in the sweet spot now, as well as one surprising Northeastern metropolis, where lack of land to build turns out to be a plus. Whether your looking to put down roots with a family home or to rent out your purchase for yield, these cities offer two things anyone making a home investment should be after: affordability and growth.
To find out where you can get the most bang for your housing buck this year, Forbes teamed up with Local Market Monitor, a North Carolina-based company that tracks more than 300 housing markets. For each market CEO Ingo Wizner analyzed housing indicators as well as broader growth trends. He came up with 20 markets where you can park your money with some confidence in 2017—and beyond.
Dallas dominates: The home of Exxon Mobil and the Dallas Cowboys claims the no. 1 ranking this year. Dallas has an average home price of $233,000. That’s up 3.9% from a year ago and underpriced by 3% compared to the city’s historic average. Local Market Monitor forecasts prices will increase 31% by 2020 thanks in part to 3.9% job growth in the past year and 6.2% population growth in the last three.
Florida holds on: Four cities in the Sunshine State made the list, the most of any state, and all are in the top 10. There’s Jacksonville at no. 2, Orlando at no. 3, West Palm Beach at no. 5 and Tampa at no. 7. Winzer says that Florida’s continued strength is the biggest surprise of the list. (Last year seven Florida cities made the cut.) Florida was the poster child for financial crisis devastation. As recently as 2015 seven markets in the state were undervalued by more than 20%. But builder constraint and job growth has boosted the value of existing homes.
Texas on top: The Lone Star State not only holds the top spot on our 2017 list but the second most spots overall, with Forth Worth at no. 9 and San Antonio at 20. The recession and housing crisis did not hit Texas quite as hard as the rest of the country, meaning it came back quicker and has been adding jobs longer and faster than the rest of the country. Opportunity and affordable housing led more people to move from other states to Texas in 2015 than any other state besides Florida. Austin, which made our 2016 ranking, would easily make a top 30 list, but is a bit overpriced compared to a year ago.
Boston bucks coastal crush: Perennially absent from this list are the major California markets San Francisco and Los Angeles, as well as East Coast megacities New York and Washington D.C. Scarcity has made these places too expensive to be top investments.
But Boston, no. 16, is a notable exception this year. With a $371,000 average, home prices in Boston are underpriced by 2% and Local Market Monitor expects prices to increase 20% by 2020. The Bureau of Labor Statistics projects that healthcare, a major industry for Boston, will be the largest engine of job growth in the country between 2014 and 2024. Like other coastal towns Boston is “geographically full,” but in this case that’s a positive since the market is slightly undervalued. Even modest population growth can cause prices to go up. At 2.7% Boston has by far the lowest population growth rate on the list.
Bargain hunters beware: The post-crisis days when investors could scoop up a bundle of foreclosed or flagging homes at giveaway prices are largely behind us. Nationally the average home price is up 5% in the last year to $268,000. Local Market Monitor forecasts a 17% rise in prices over the next three-years. That’s between 5% and 6% annually—a respectable return, but hardly enough to make a private equity investor swoon. The economy has largely recovered, so prices that look too good to be true probably are.
“There are markets that are underpriced, where the local economy is in such terrible shape that you wouldn’t want to invest there,” says Winzer, pointing to small Midwestern markets after factory closures. “People are still living there, their house isn’t worth a whole lot, but it is never going to be worth a whole lot because that factory is not coming back.”
To compile this list Winzer began with 330 markets. He first removed markets that were too small (those with populations below 500,000) and then discarded those that performed worst on key metrics. Finally he drilled down to 20 by identifying markets that score well across five measures: annual job growth, three-year population growth (2012 to 2015), annual home price growth, affordability and Local Market Monitor’s own three-year home price forecast, which we used to rank the list this year.
Those last two metrics—affordability and price forecast—are the most important.
Dozens of metrics, ranging from unemployment to demand for real estate, go into Local Market Monitor’s three-year price forecast, but the special sauce varies from year to year. For example, unemployment was a top input as recently as last year, but as rates hover near full employment that number is less telling.
To judge affordability Winzer uses a measure of home price versus income price. That is the real current average home price in a market versus what that price would be if the historic relationship between home prices and income held for that market. For example, in Grand Rapids, Mich. the average home costs $166,000 or about 3.6 times the local per capita income. Historically, however, homes sell in Grand Rapids fir about 4 times local income. Meaning homes in the city are 25% underpriced or -25% below income price.
From about 15% to -15% is considered normal. In general, a market is considered overpriced if this measure, which can be negative, is 30% or more above income price. While being underpriced is a positive for people buying in a city where the economy is growing, like Grand Rapids, it can be a big negative in places without growth on the horizon.
“If you look at the relationship between home prices and income in a local market over a long period of time, 15 years or so, there is usually a pretty straight forward relationship,” says Winzer. “Generally in markets where income is above average, prices are also above average and vice versa.”
“When a market gets out of whack it always comes back to that income price.”