What’s old is new again. Prior to the bursting of the housing bubble in 2007-2009, certain “sun-belt” markets were some of the fastest growing in the nation. Places like Tampa Florida, Phoenix Arizona, Las Vegas Nevada and Sacramento California were some of the hottest markets in the nation. When the bubble burst, these markets saw some of the largest drops of any market as well.

Yet by just about any measure, all of these markets are back, with Phoenix topping the list of fastest median home price growth over a 12 month period which was 14% on a real basis in January.

The Case-Shiller figures tend to have a 3 month look back in the data so what is recorded in January is more like looking at October data. If we try to look at more up to date figures like in this report by real estate company Redfin in February, which also looked at smaller metro areas than the Case-Shiller index, the numbers are even more eye popping. Jacksonville Florida saw the value of the housing stock jump 21.1%, Austin by 17.9%, Charlotte by 17.3%, Phoenix 16.1% and Sacramento 14.8%.

A number of different factors are contributing to the broad home price rises including:

• Mortgage rates recently dipping below 3% which is the lowest they have ever been.
• Millennials born in the 1980’s are starting to close the gap in terms of wealth with their parents at the same age and are entering their prime home buying years.
• New home construction, though booming, is still lagging demand.
• Homeowners are staying in their houses for longer. That fabled great move out of the boomer generation hasn’t materialized.

We are looking at an unprecedented broad based rally in home prices across the US fueled by these factors. Some of this promises to cool off. Markets like Cleveland just don’t seem to have the growth in median incomes fueled by job growth to sustain such a rally. Higher rates above 3% recently may cause some of the activity to cool off and building may start to catch up with the demand and ease the pressure on buyers.

Yet even with all these factors, the general trends that have been in play for decades promise to continue and have accelerated in the pandemic. This is the trend of people generally moving south and west to the cheaper areas of the US.

The Sunbelt is Back

The US census looked at the fastest growing counties as well as metro areas by the shear number of people who moved there from 2010 to 2019 and counties in Texas took 6 of the top 10 over that period as well as the top two spots in terms of numbers moving into the metro areas.

With the exception of Riverside California and the DC metro area, all of these places have a few things in common: room to build, low or no state income taxes, job growth and for the most part, warm weather. Austin has made itself into an alternative tech hub. The growth has been so strong you are seeing more and more regular non-stop flights into the city, a place that often took a multi-legged trip to get to before from a major hub.

Even in California, the oppressive prices in places like the Bay Area and Los Angeles are driving people to more remote locations within driving distance of the large metro areas that offer more room to build and more affordable housing.

Take for example Sacramento, where I own a home. I ended up in this market by chance with a friend who moved there starting a business. The business required real estate so we went into business together with myself financing the underlying real estate. Although the business is winding down, a recent visit to the property showed me why continuing to rent based on the demographic shifts would be such a good idea as opposed to selling.

The first is that there is room to build there so there is plenty of space for the population to grow. As opposed to places like the Bay Area or Los Angeles, which are limited in their buildable area by mountains, Sacramento and other Central Valley cities sit on a vast plain called the San Joaquin Valley. A flat, wide open landscape gives the city plenty of room to spread out.

The second is the proximity to the Bay Area and the spread of working from home mean that the hour and a half trip into San Francisco from Sacramento doesn’t seem so bad if you only have to make it every once in a while. Locals explained to me that much of the home price appreciation recently was spurned by tech workers who wanted cheaper homes and wanted to more room than what they could get in the Bay Area.

The third is the weather still tends to be agreeable. Although summers can be very hot and dry, winters are temperate and cool. You won’t be bothered by endless rain (Seattle) or freezing temperatures (anywhere in the Northeast).

Add to that a new casino which will be going up south of the city and you can easily envision a situation where current homes continue to appreciate in price, even if there are higher rates.

Riverside county, which lies East of LA and includes towns like Palm Springs, shares some of these characteristics: hot, dry and cheaper than the large metro areas they lie close to.

Better in Texas?

Yet with all the factors I just explained, it would seem that if you don’t mind the heat, being further from the ocean and would like a bigger, more affordable place, you may as well move to Texas. Besides, you won’t have to deal with the highest state income taxes in the nation there.

It’s for these reasons, as well as the job options that I think we see so many people moving into Texas from other states but especially California. Arizona too, offers a respite from the high taxes and exorbitant home prices. That area has topped many of the lists of fastest growing places, probably for those same reasons.

For these reasons, I will be making my next home investment not where I currently have a home in Sacramento but in Texas where the future seems brighter. I see Texas currently as being very similar to California when it saw its high growth period in the 1970’s.

The 1970’s didn’t have many great investment opportunities besides gold but one of them happened to be California real estate. In 1970, the median sale price of a home in California was $24,300 compared to $23,000 nationwide. By 1980 that figure was $99,550 compared to $47,200 for the entire United States. This corresponded to an increase of 13.7% annually while inflation for the decade averaged 6.8%. This was driven by homeowners who elected politicians which created strict environmental and zoning laws which prevented the construction of apartment and multi family housing which would make more sense given the population density there. At the time, affordable housing, a government that kept taxes relatively low and good weather all attracted people to the state.

Texas has all of these qualities now which is why I think you see so many people, including Californians, heading to the state to live. Yet the question remains if these new residents will learn anything from the experience m California. As population density grows, will Texans let their neighbors build apartments or will they cling to their homes like in California? Although Texas seems like it big and has room now, so did California at the time.

Even if zoning restrictions and building restrictions don’t get put in place in Texas, the growth of the population may be enough alone to justify purchasing there. People often prefer houses to apartment and townhome living and the current market still has affordable deals for large homes, especially compared to other markets.

Florida would also be a strong contender in this case but my connections there are weaker. Despite that it’s only a 2 hour flight from NY, who you know on the ground matters, especially when you are an absentee landlord.

So look for these trends to continue, residential REITs that focus on Sunbelt markets promise to do well as well as home builder shares. I am looking for a pop in earnings after the first quarter of the year due to the hurried pace of construction. I don’t think they will get to make a dent in the Sacramento market so if you don’t have the capital for a home yet, the builders are a good way to play this trade.

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