Stability tends to be an undervalued trait in investment assets. Though this seems counter to the nature of investing, investors are guilty of chasing the highs of the industry. Whether it’s knowing that high risk yields high rewards or simply the human need for a thrill, we’re attracted to high-octane investing.
Unfortunately, that’s not where you’ll build lasting success. Market highs are great while they last, but the pendulum will swing eventually. That’s why investors do well to target stable – and yes, boring – investment markets, not volatile ones.
But which housing markets are stable? And how can you tell?
Here’s what the data says!
The Most Volatile vs. Most Stable Real Estate Markets
Construction Coverage defines market stability as the probability that a homeowner who purchased a home between 2000 and the present would experience a price drop exceeding 5%. Little Rock, Arkansas, one of our REI Nation investment markets, came in at the most stable housing market among small and midsize metros with a 0% chance of a >5% price drop. Among large metros, Houston, Tulsa, San Antonio, and Oklahoma City, all REI Nation markets, were named among the most stable.
But what truly makes a housing market stable? Thankfully, we don’t have to rely solely on hindsight to see the signs.
Signs of a Stable Housing Market
Sign #1: A strong local economy
We discuss this point frequently, and for good reason. A strong local economy is defined by a few key factors, including:
- Diverse industries. The market should not rely on one industry to shoulder economic success or the lion’s share of jobs. If that industry suffers, everyone, the housing market included, will suffer as a result. You want a market that can take a few economic punches without going down.
- Job creation. Emerging job opportunities, particularly in high-skill industries, bode well for the housing market. It means that employers are investing in the area and that, in turn, will attract professionals looking to plant their roots.
- Median income. As affordability is one of the biggest challenges facing the nation, growth in median income creates a more sustainable market. If households are barely making ends meet, they will look to move elsewhere, for both affordable housing and higher-paying jobs.
The health of the economy directly correlates with the health of the housing market, period!
Sign #2: Growing rental demand and inventory
The U.S. housing market has been in a strange place for a long time. Since the Great Recession, a distinct lack of inventory drove home prices up. Those prices only accelerated with the COVID-19 pandemic, a global crisis with a habit of putting existing trends into overdrive.
A healthy market will see balanced growth between demand and supply. This keeps prices in check and points to population growth. That, in turn, results in housing demand.
With interest rates higher than they’ve been, demand is cooling. This gives the construction industry a chance to catch up – something we’re already seeing in the multifamily sector. This increase in inventory will help keep home prices in check.
When demand returns in full force, the market will be better equipped to bear that demand without buckling – or seeing astronomical housing price increases.
Sign #3: Affordability
Investors don’t love talking about affordability. It immediately makes us think we’ll have to accept lower rent prices and thus, less cash flow. But affordability isn’t detrimental to investors. Not in the grand scheme of things! Markets that lack affordable options will struggle to see very necessary first-time homebuyers. It can also result in out-migration and a lack of economic stimulation.
When we talk about a lack of inventory, it’s important to note that that lack is almost exclusively among affordable, entry-level properties. There are often plenty of luxury properties on the market!
For the investor, a market that achieves a balance between housing costs and median income creates more stable, reliable renter households. These households will also be more likely to renew their leases and stay where they are.
Real estate markets are full of surprises. Investors set themselves up for success when they carefully evaluate market health – not just real estate health – and act accordingly. You don’t want a market that can fetch the highest rent price. You want a market that will produce reliable rental income with minimal turnover.
REI Nation carefully vets each real estate market for long-term investment potential.
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