Buying a home is the largest purchase many people will make in their lifetime. If bought with a mortgage, it’s effectively an investment bought on margin. Homeownership’s tax advantages coupled with the fact that you’re probably also going to live in it increases the appeal.
The market is up right now. Economist Robert J. Shiller found that U.S. homes historically appreciate less than 1% above the rate of inflation. Of late, however, home values have been soaring. The national median price for an existing single-family home in the first quarter was $205,200, up 7.4% from the first quarter of 2014, according to the National Association of Realtors.
The median for new homes exceeds $280,000, though those typically only make up one-tenth of all home sales.
So where are the best places to make your home investment? The trick is finding a desirable area with strong job growth, say experts.
West Coast Rules
The most expensive market for existing single-family homes (including condos) is San Jose, Calif., where the median price was $900,000 in the first quarter, according to the association. San Francisco comes in second at $748,300; Honolulu is third at $699,300; and the Californian metro areas of Anaheim-Santa Ana and San Diego round out the top five at $685,700 and $510,300, respectively. These prices are for cities and their surrounding metropolitan areas. Thus, New York City — where a lean-to made of rat hide in a garbage-strewn alley might sell for a stack of gold — is lumped in with surrounding areas of Long Island and New Jersey, which lowers its overall median price to below $400,000.
Real estate prices are highly correlated to employment growth, said Brian McAuliffe, an executive managing director in CBRE Group’s (CBG) Capital Markets division. “Cities and their immediate surroundings have done well in recent years, and should continue to do well, so long as job growth continues,” he said. “In particular, San Francisco, Seattle, New York, Chicago and Boston have done well in the past five years, and should see continued growth in the years to come.”
McAuliffe’s other picks as to where home prices are rising: Texas, Washington, D.C., Los Angeles, Denver and Charlotte, where a strong financial services sector is blooming along with a robust high tech scene.
“We’re seeing the reemergence of urban communities,” said McAuliffe, citing the increased interest in “live, work, and play communities,” where people — including the upcoming Millennial generation — are forgoing long commutes to the suburbs to live close to the urban areas where they work and socialize.
Prices in Recovery
Looking at domestic real estate prices on a regional basis, the West and South are doing exceptionally well, said David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, which puts out the S&P/Case-Shiller Home Price Indices, a leading measure of U.S. home prices. He added that prices in Denver and Dallas hit new all-time high prices in the last several months, while the Midwest and Northeast saw more moderate price gains.
Nationwide prices plunged about 35% when the housing bubble collapsed in 2008, but they have recovered by about half to two-thirds of where they dropped to, he said.
“Across the entire country, prices are up about 4.5% over the last year,” said Blitzer. “That is about double the inflation rate and double the rate of wage growth.” He also cited an improving economy and job market for aiding the rise in prices; low inventories are pushing prices higher in some regions.
The Bottom Line
U.S. housing starts have nearly doubled in the past five years, which shows the strength of the residential marketplace. Commercial real estate has done even better, having recovered nearly all recession-era losses thanks to gains hovering around the double-digits for the past five years. With the U.S. Labor Department reporting that the unemployment rate dipped to 5.4% in April — the lowest rate in seven years — it seems likely real estate will continue trending upward for the foreseeable future. Your best bet for a good deal is to seek out areas with lots of job growth potential.
By Joseph A. Dallegro | May 27, 2015