Let’s explore which cities are most vulnerable to a housing market downturn so you can make smarter real estate investments. Here’s a rundown of factors that could trigger a national housing downturn:
– An oversupply of homes
– Lax lending standards
– A health crisis impacting fertility rates
– Stagflation
– New, harsh real estate tax laws
Real Estate Supply and Demand Dynamics
I hesitated until 2016 to invest due to concerns about supply. If limitless land allows for endless construction, home prices might not rise as expected. For example, in San Francisco, it’s tough to build new homes. The city is tightly packed into about 49 square miles, mostly surrounded by water and largely zoned for single-family homes. Most residents oppose new developments in their neighborhoods due to potential increases in noise, traffic, and crime, and decreases in parking, sunlight, and views.
Ironically, bureaucratic delays and inefficiencies in San Francisco have protected homeowner investments. It once took me over a year to get a permit to remodel because of a botched online system at the Department of Building. Such barriers mean fewer new homes are built, indirectly boosting existing home values.
After observing a trend of people moving to lower-cost regions, I invested heavily in San Francisco real estate in 2017. This strategy has paid off, but the risk of a downturn is growing due to rapid price increases and a looming surplus of new homes.
Which Cities Face the Greatest Risk?
A chart by John Burns R.E. Consulting reveals a lot about risk levels in different cities. It shows that cities like Chicago, Las Vegas, and Miami are currently appealing for investment as they have not recovered fully from previous peaks and are seeing declines in building permits.
Conversely, heartland cities like Austin, Dallas, Nashville, and Houston show signs of overheating with high prices and lots of new construction. Cities like Philadelphia, Charlotte, Las Vegas, and Orlando are now more attractive due to their lower permit activity.
Artificial Constraints in Some Cities
Cities like New York are intriguing because they’ve seen modest price increases and significant drops in permits. This suggests that bureaucratic hurdles are limiting new construction, which may reduce the risk of a downturn there.
The Real Estate Cycle
Real estate naturally experiences cycles of boom and bust. Developers often misjudge the timing for land acquisition and construction, leading to phases of oversupply. For instance, in Austin, prices have soared 160% above the previous peak, encouraging developers to start new projects that might not hit the market until prices begin to fall, potentially leading to a market correction.
The Permitting Ordeal
Getting a building permit can be a lengthy and frustrating process, especially in cities with strict building codes and inefficient bureaucracies. This can delay projects significantly, impacting the profitability and timing of investments.
Diverse Market Responses
Although a national housing downturn seems unlikely soon, local markets could vary widely. Cities with booming supply might cool down, especially if they’ve already seen significant price increases. On the other hand, areas lagging in recovery or job growth might attract more investment as the nation returns to normalcy.
In summary, while I remain optimistic about real estate overall, it’s crucial to stay aware of potential increases in supply when planning investments.
