As house prices skyrocket in some cities, buyers are looking for crazy cheap alternatives
Nick Huber earns a sum well in the six figures, but when he went shopping in Boston, the entrepreneur felt like he was barely scratching. He determined that even a cramped and dated house, located in a neighborhood that required a grueling commute, could cost him $ 750,000, plus $ 12,000 a year in property taxes.
Huber, a commercial real estate investor and new father, had a heart to heart with his wife. They decided to move to Athens, Georgia, where they could purchase a 2,700 square foot house with a large yard for less than $ 300,000.
“I love the city and I love the energy, but it just wasn’t worth it for me,” says Huber, explaining why he chose to leave the Boston area.
Huge affordability gaps have opened up in the US housing market over the past generation, which means Americans are increasingly analyzing whether it makes sense to buy a home in one of the country’s high-cost markets.
A typical house in San Francisco costs over $ 1.3 million – it’s not for a mansion, just a mid-priced home that is likely in need of some work. In Silicon Valley, the mid-priced mansion will set you back nearly a million dollars.
While northern California is the epicenter of the country’s affordability squeeze, prices have soared elsewhere as well. Boston, Denver and Seattle are among the areas where prices have skyrocketed. Yet in big cities like Cincinnati, Cleveland, Detroit, and St. Louis, the typical home sells for less than $ 200,000.
The widening chasm presents a conundrum: Do you view high-value housing as the cost of living in a city with an abundance of well-paying jobs? Or are you hitting the more expensive places in search of more reasonably priced areas? It’s a decision that took on increased urgency during the coronavirus pandemic, when many workers stopped coming to offices.
There’s a flaw in the math: the more expensive markets rewarded homeowners with solid appreciation. And the cheaper markets, while attractive, have created little new real estate wealth. In the worst performing regions, home values have not even kept pace with inflation.
This means that over the past 25 years, Americans who have paid to own homes in expensive markets have been rewarded for their investment.
4 cities with booming real estate values
Cities with the most extreme increases in home values are hotbeds of economic opportunity. They have lots of well-paying jobs, a prerequisite for strong price growth.
“Home value is a reflection of income,” says Brodie Gay, vice president of research at Unison Home Ownership Investors, a financial technology company. “Strong job growth is attracting young talent, so there is this virtuous circle. “
Northern California is the epicenter of the squeeze. The stories of Silicon Valley engineers living in campers on campus have become a legend. “A lot of people have gone to Nevada, Arizona or Idaho, ”says Bill Aboumrad, owner of Legacy Real Estate & Associates in Fremont, California. “I can go somewhere else and have a lot more home.”
Geographic barriers also play an important role. Manhattan and San Francisco are surrounded by water, features that create supply constraints. But in areas like Atlanta, Dallas, and Phoenix, builders were able to keep building new suburbs further away from the city.
Consider the price trends in these places over the past quarter century:
-
- In San Francisco, the median price of homes sold in the first quarter of 1995 was $ 273,000, according to the National Association of Home Builders / Wells-Fargo Affordability Index. By the first quarter of 2020, that figure had climbed to $ 1.33 million, an increase of 387%.
- In Silicon Valley, the median price in 1995 was $ 224,000. In 2020, the median was $ 970,000, an increase of 333%.
- The median price for metro Denver in 1995 was a modest $ 115,000. A quarter of a century later, the amount was $ 424,000, a jump of 273%.
- In Seattle, the median selling price was $ 146,000. At the start of 2020, the typical home was selling for $ 535,000, an increase of 266%.
4 cities with stagnant real estate values
Despite soaring house prices in booming regions, many cities with inexpensive housing have failed to attract new residents. Sam Khater, chief economist at mortgage company Freddie Mac, sums up the paradox this way: “Yes, it’s affordable, but nobody’s moving out there. “
Here are four places where home values have barely moved in the last generation:
-
- In the Metro Detroit area, the typical home was selling for $ 95,000 at the start of 1995. At the start of 2020, the median price was $ 135,000, a 42% increase that has not even kept pace with inflation during this period.
- In Cleveland, the typical price was $ 85,000 at the start of 1995. In 2020, the typical selling price was $ 130,000, a 53% increase that was also lower than the rate of inflation during the period.
- In Syracuse, New York, the typical price a generation ago was $ 76,000. In 2020, the typical price was $ 132,000, a 74% increase that basically matched inflation.
- In Cincinnati, the median price of a home 25 years ago was $ 90,000. In 2020, the median price was $ 166,000, an 84% increase that barely exceeded inflation.
Pressure on the middle class
Here’s one way to think about the affordability gap: In 1995, the typical Silicon Valley home cost twice as much as a typical American home. Today, a Silicon Valley home costs 3.5 times more than a median-priced home in the United States
Here’s another way to measure the chasm: In places like Scranton, Pennsylvania, and Toledo, Ohio, a house costs only double the annual income of a typical family.
At the start of 2020, a typical Scranton family was making $ 66,600 and the median-priced home sold for $ 113,000, according to the National Association of Home Builders / Wells Fargo index.
In San Francisco and Los Angeles, a typical house costs almost 10 times the income of a typical family. The median income in Los Angeles is $ 70,600, and the median priced home has hit $ 638,000 in the first three months of 2020.
Soaring house prices have created challenges for teachers, nurses and other low-paid workers in these communities. Even tech workers with six-figure incomes find the Silicon Valley housing market insanely expensive. And the uneven appreciation in home prices makes it increasingly difficult for Americans to move from cheaper markets to more expensive places.
“Unless that changes – which I don’t think will change – the middle class cannot afford to live in these high-cost coastal markets,” says Joseph Gyourko, housing economist at the Wharton School of Business from the University of Pennsylvania.
Give up excessive appreciation?
If valuation trends continue – and this is a big if – home values in Silicon Valley, New York and other high-priced areas will continue to appreciate strongly. And values in Detroit and Cleveland will continue to lag.
“Real estate is very sticky and very persistent,” Gay says. “There is a lot of momentum in home price trends. “
This means Nick Huber could take a risk by leaving an expensive area for a more affordable area. After all, home prices in Boston have climbed 237% in the past 25 years. In Atlanta, the metropolitan area closest to Athens, they increased by only 121%.
Huber doesn’t believe Boston’s values can continue to climb at the same rate they did the previous generation. “I realized that unless rents went up exponentially, values were going to have to slow,” he says.
He is not alone in this conclusion. Gyourko also doubts that expensive cities will continue to appreciate at their past pace.
For Huber, the math was simple: He could spend almost $ 50,000 a year on mortgage payments and property taxes to live in a Boston house that felt cramped. Instead, he spends less than $ 20,000 a year on his mortgage and property taxes in Georgia.
He did not take the movement lightly. He and his wife made a list of things they wanted in a hometown. The items included not only affordable homes, but also craft beer, outdoor sports, and a nearby university and airport.
They had never been to Athens, but it met their criteria. Two years after moving there, the Hubers have made close friends and Nick is part of a cycling team.
The couple also welcomed their second child into the family. Nick converted the house’s unfinished basement into a home office. So he works from home and there is still plenty of room for his family.
“We feel incredibly lucky to have more space,” says Huber.
Image presented by Alex Trautwig / Getty Images
