With a new year and a new president approaching, change is on the horizon for the real estate market. While we’re cautiously optimistic that the U.S. housing market will turn in our favor, we also know this: success depends less on market conditions and more on our informed decision-making backed by solid fundamentals.
Identifying risky real estate markets is crucial for investors to protect their capital and make informed decisions. But how can you know that a market carries elevated risk? Take a look at these critical factors!
First things first: economic indicators. Markets heavily reliant on a single industry or experiencing layoffs and high unemployment are riskier. Pay attention to industry demographics, volume of new businesses and employers, and wages. Be mindful of what these industries are, too. Markets tied to volatile sectors, like oil or tourism, are prone to sharp economic downturns. A poor outlook can be catastrophic when the market relies on those industries.
Declining population growth or outmigration signals reduced housing demand, too. While there will always be a natural ebb and flow to population, you want to be wary of patterns of decline.
Investors should look to real estate market data at every opportunity. High vacancy rates or stagnant/falling rental rates mean weakened demand. Beware, too, of activity in “hot” markets. Rapid price increases often result in corrections. These areas frequently experience overdevelopment, too, leading to depressed property values and rental rates.
Affordability is the challenge in real estate right now. Costs are simply high. While that alone isn’t necessarily a reason to write off a market as risky, investors must be mindful. Where property prices far outpace local income levels, it signals overvaluation and reduced sustainability.
Further Reading: 6 Hidden Risks That Come with Passive Real Estate Investment
Markets with stringent rent control or anti-investor policies increase operational challenges. These often impact multifamily housing more than SFRs, but be mindful. Additionally, consider tax policies. Areas with high property taxes or potential sharp tax increases eat into profits.
Markets with poorly rated schools and underfunded public services deter long-term residents. When these needs emerge, they’re likely to move! Poor infrastructure matters, too, from transportation access to the availability of quality wifi.
Markets heavily reliant on short-term rentals (Airbnb, VRBO, hotels & tourism) can face volatility during economic downturns. Their presence isn’t inherently bad, but the reliance on a luxury industry (tourism) can be risky. Speaking of risk…Markets with significant exposure to natural disasters (tornadoes, hurricanes, floods, wildfires, etc.) may require higher insurance premiums and maintenance costs. (We’re not trying to pick on Florida, promise!)
Markets with a history of unstable property prices can signal speculative bubbles. You want to avoid these rollercoasters – aim for slow and steady. Additionally, if a market took longer to recover from past recessions, it might be less resilient. Consider the markets that fared best after the 2008 Great Recession. Houston bounced back fast because it had a diverse, strong backbone and a tempered market that didn’t have as much room to fall.
Finally, consider financing trends. A high volume of risky loans may indicate a housing bubble. Growing default rates suggest financial strain in the market, ultimately leading to foreclosures and depressed housing prices.
Still worried about investment risk? Don’t worry – your REI Nation advisor is ready to help you build a world-class portfolio.
Start investing with REI Nation, where you invest and we handle the rest!