Job growth, or the lack thereof, can have a large impact on a real estate investment, whether that investment is your primary residence, a second home or a rental property. The ability to sell real estate at a profit over time, or to successfully rent out a home, is often determined by the degree of job growth in an area.
So this week, I want to show you a link from a recent NYTimes.com article, called "The Geography of a Recession," which shows the unemployment rate for the entire United States, broken down by counties. You can scroll your mouse over each and every county and it will show you the current unemployment rate, plus the change from one year ago. In this case, getting a plus mark is a negative, so that 4.8% would indicate that the unemployment rate increased by 4.8% within the past year.
You will notice that the various states and counties are shaded in different tones, according to the rounded-off unemployment rate for each area. The darkest-shaded areas, such as many parts of Michigan, California and Oregon, have the highest jobless rates. In fact, some of these areas now have unemployment rates above 20%!
On the other hand, there are still many regions of the U.S. where the unemployment rate is very low. Several of the Midwestern states, such as Nebraska, Kansas and Oklahoma, have unemployment levels of only 3% or 4%! Several other states, such as Wyoming, Utah and New Mexico, also have many areas of low unemployment. Most of the East Coast remains a mixed picture, with rates in a broad range between 4% and 12%.
In my state of Florida, the unemployment rates are double digits in several areas, but Alachua County, home to the University of Florida, bucks the trend, with a surprisingly low 5.8% rate. Business is good in a college town!
How, Why Do Employment Levels Affect Real Estate Prices?
First, job growth can create tremendous opportunities in an area for price appreciation. When a new industry or large company expands in an area, it can mean that a steady supply of buyers and renters will push prices up in that area for several years. Even a temporary increase in employment, such as construction repair jobs following a hurricane, can spur housing demand and, in turn, an increase in prices.
But steady, long-term job growth works best to keep a housing spurt from stunting. One recent example was in Charlotte, N.C. In 2006, CNNMoney.com picked Charlotte as one of the best places to live. Charlotte's job growth percentage was 6.58% in 2000-'05. Still, the home price gain during 2004-'05 was only a modest 3.4%, when other areas were seeing larger booms of appreciation.
However, throughout 2006-'08, as other areas were crushed by enormous price declines, Charlotte's home prices remained fairly stable by comparison. Areas like California and South Florida experienced one-year losses of 25% and 30%, and cities such as Seattle, Atlanta, Chicago, Minneapolis and Detroit were down between 11% and 20%. But Charlotte's prices fell by only 5.3%. If Charlotte was like the tortoise and Miami the hare, slow and steady was clearly the place to be!
Miami 2006, about to get a lesson in market bubbles...
But few regions are immune to layoffs in a severe recession, and Charlotte's unemployment rate has recently risen to a hefty 9.5%. So even from the tortoise, we can expect to see further price deflation in the near future.
My second point: When a city or county relies on only one industry for the bulk of its jobs, they are at a huge risk for real estate price deflation.
Imagine a city with a very large military base. What happens if the government decides to close that base? Well, this has happened many times before, and the local economy and real estate market really suffers as thousands of people have to suddenly relocate. Military relocation can make a ghost town of the area that is left behind, while enormously enhancing the new area of the relocation.
As you can imagine, this often triggers a political fight, such as the recent one between Virginia and Florida officials, when it was decided to reduce the risk of having all of our nuclear forces in one area, by moving one nuclear-powered aircraft carrier from Norfolk to Jacksonville.
In a fascinating show of political force, in one corner was Virginia Sen. John Warner, the former Secretary of the Navy, and in the other corner, Jeb Bush, the governor of Florida and the brother of our ex-president! Although it is still technically considered "under review," the decision on whether or not to move the carrier to Jacksonville is now largely a fait accompli.
Guess who won?
Another clear example of over-reliance upon one major industry to support real estate prices is now apparent in Michigan, where layoffs within the auto industry led to spiraling layoffs in many other companies who serve the auto industry, and a resulting decimation in the local real estate values.
Just How Bad is it?
This morning I ran a search for single-family homes for sale in Detroit, between $1,000 and $20,000. I found 2,485 active listings!
It is no coincidence that, of all the 20 major cities in the recent S&P/Case-Shiller home price index, the Dallas area experienced the lowest one-year decline in home prices. Homes in the Dallas area on average lost only 3.3% of their value.
When the real estate market finally bottoms, Dallas will probably become one of the strongest areas of the United States for real estate appreciation. In fact, RelocateAmerica.com just named Dallas the second-best city in which to live, just behind Tulsa, Okla. These are stable markets that avoided the crazy price run-ups of the mid-2000s.
So, to recap, if you are looking to buy a home for yourself or for investment in an area that is more likely to appreciate over time, look for the following economic factors:
1) Strong and steady job growth with low unemployment rates.
2) A diversified economy, not dependent upon only one industry.
3) New jobs or industries that are causing population growth to rise.
Of course there are other factors, such as good schools, good weather, low crime numbers and excellent healthcare facilities that also contribute to local real estate market appreciation. But when push comes to shove, here's where you want to put your real estate dollars:
The Tycoon Report