Why is my city so heavily underperforming?

Question

The city I'm invested in - Worcester, MA is the 2nd largest city in New England. It has 13 colleges and universities. Unemployment is back down to 6.1%.

It's in the bottom 5% of the Top100 metro areas however. I can't figure out why this is. I'm a cashflow investor and I'm cash flowing nicely, so it's not a major concern. I'm thinking about buying more properties in this area though, so having an idea would be nice.

Mike Hurney · Answer

@Alex Silang

"I'm a cashflow investor and I'm cash flowing nicely, so it's not a major concern..."

I'd keep it quiet if I were you;-)

Michael Henry · Answer

@William Hochstedler many cities have targeted neighborhoods maps that the city is pumping money into. Many times the area within the map is not the hot neighborhood but the area outside the map area is the hot neighborhood.

Ask your city planner if they have such a map.

Secondly, In every city where there is development (e.g. apartments building being build) will always (all things being even)  be in area where they can get the most rents, or an area where some type of business expansion is about to take place. These large development companies are doing all the research for you.

Ask your city planner what development is going to take place in the next 6 to 12 months.

Shaun Reilly · Answer

My feeling on Worcester is that is not poised to explode anytime soon.

If your goal is good cash flow and some appreciation potential you aren't in a bad place.  Unlike some of the Midwest Cash Flow areas where you can buy places more or less for the same price you could have 20 years ago that is not at all the case here.

Year over year data like that isn't really useful unless you are doing short term appreciation plays that are more than flips (so not necessarily forcing a lot of appreciation) but not really a long term strategy, i.e. a 1-2 year hold type.  Just took a quick look at city data and they had the median price for a house or condo being $118,400 in 2000 and $204,900 in 2012.  That is a 73% increase in 12 years which included the crash but not the major recovery the last couple years (which is where the Core Logic thing would hurt it).

Do the same thing for Boston (Which nobody would say in hurting) and you get $210,100 and $370,400, which is a 76% increase.  So by the percentage they did just about the same over 12 years.  The Boston numbers are way higher so the profit is much bigger but the pace is the same.  Though I am sure that when the last 2 years are taken into account this would change since Boston is getting run up stupid during that time.

As you get farther from Boston prices go down and markets weaken.

Boston.com did a good piece on this a week or so ago:

http://www.boston.com/real-estate/news/2014/11/06/...

Also I have been doing a lot of year over year market reports on my blog and have close to 20 cities and towns showing the market going down.

http://masshomesale.com/category/market-trends/

This is a lead generating one so I'm not going to waste time talking about places that are still going up 10-20% year over year, but I'm not having much trouble finding ones that are already dipping.  And I am not looking as far west as Worcester at this point and central MA is generally a weaker area anyway.

So my basic point is that you aren't going to go to Worcester specifically for a big appreciation play, however it does and will continue to go up as the "stronger" areas go up but maybe not quite as fast and since it is lower to start your score won't be as high.  However unlike Greater Boston you don't have to absorb 5-10 years of breaking even or feeding the gator to start to see the fruits of the labor.

William Hochstedler · Answer

I guess the $1B question is do any of these non-coastal industrial cities ever turn around?  Are there examples in the rust belt or anywhere else where city-wide gentrification has happened and shown significant appreciation since the rise of the service economy?

@Michael Henry What questions are you asking at city planning to find hot neighborhoods?

@Alex Silang It's gotta be better than Lawrence, right?

Alex Silang · Answer

Jon, I did do research. I felt that it was worth buying because of the cash-on-cash return. Since then, I've learned about turnkey properties. For my next rental, I am considering investing out-of-state rather than acquiring more in Worcester. Appreciation potential is a major factor.

Here's something http://www.trulia.com/trends/2014/06/bubble-watch-q2-2014/.

Trulia published the 10 most undervalued real estate markets. Worcester was #5.

Home prices relative to fundamentals 2014 Q2: -15%

Home prices relative to fundamentals 2006 Q1: +43%

Year-over-year change in asking price: May 2014: 4.4%

Their methodology:

To try to put numbers on it, we look at the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trends using multiple data sources, including the Trulia Price Monitor as a leading indicator of where home prices are heading. We then combine these various measures of fundamental value rather than relying on a single factor, because no one measure is perfect. Trulia

Account Closed · Answer

@Alex Silang

I may be different than other investirs on here, but I prefer to invest in expanding markets where I can obtain good cash flow plus solid appreciation. That said, I focus on cash flow and appreciate is the upside/never guaranteed. I will never invest solely for appreciation. That's too speculative.

Trevor Western · Answer

Alex

I think Peter Cohan (who teaches business strategy at Babson) had a good reply in his follow up article to that same CoreLogic report.  See link below.

http://www.telegram.com/article/20140611/COLUMN70/...

He goes on to conclude:

"But Worcester educates and then exports to much of that talent. And its housing market is among the nation's worst. Getting that talent to stay in Worcester and start fast-growing startups is an obvious solution that remains firmly outside the city's grasp."

But if you're a buy-and-hold investor you are looking at a lot of reasonably priced houses that can cash-flow.  Just plan on staying in the Worcester properties for 5-10 years or however long until it makes sense to sell.   Just don't get yourself in a position where you're forced to sell a Worcester property.

I'm continuing to invest in Worcester.  It looks like great long-term opportunities to me.

Elizabeth Colegrove · Answer

I wouldn't worry about it :) Everyone has a different opinion. Just watch your market, signs and  cash flow. If you are doing well and you don't see anything specific coming up. Than I would proceed, just keep your eyes out!

Alex Silang · Answer

From a newspaper editorial:

Worcester's real estate market is among the bottom 5 percent of large metro areas in the U.S. That's according to data provider CoreLogic that reported on April 2014 home price changes from the year earlier — concluding that Worcester was joined by "Hartford, Connecticut; New Haven, Connecticut; Milwaukee, Wisconsin; and Little Rock, Arkansas as being among only five of the 100 largest metro areas in the United States that did not reported higher home prices in April compared with a year earlier."

Stefan Tsvetkov · Answer

@Alex Silang Fast forward 6 years, and the city is the worst price performer out of 24 cities (>50k population) in the state of Massachusetts, just 4% above its 'fair valuation' level of 2008. I study cities/areas for out of state investing. I see income growth as subpar within the state, and population growth somewhat average. Interesting, how nothing really changed performance-wise in this time.

Why is my city so heavily underperforming?

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