If you didn't own in your current market... Where else would you consider?

[Tom Henderson]

The answer for me is pretty simple... Omaha, Nebraska, or Fargo, North Dakota. 

Omaha, Nebraska

- very solid, long-term businesses-- transportation, Agriculture, financial services 

- Creighton University, University of Nebraska Omaha-- great schools with graduate programs

- Relatively low barrier to entry

Fargo, ND

- programs to bring in business

- North Dakota Oil Boom-- Bakken Oil Fields

- Strong economy -- diverse SMB businesses 

- Relatively low $ barrier to entry

- low crime rate

How about you? Where would you own? Small town in Washington? Metropolis in Colorado? ;-) 

Cheers

Tom 

[Dan Brewer]

If you are unfamiliar with an area, or are looking for new areas in which to invest, asking for opinions is one option.  However, with the availability today of so much data, many intelligent conclusions can be drawn simply by procuring and evaluating the data.  And much of this data is free and readily accessible via the internet.  

A tried and true measure that has been around for a long time and is still relied upon today is the ratio between median household income and median home prices in any given market.  Historically, on a national scale, median home prices average about 2.2 to 2.5 times median household income.  For example, if median household income were $100,000, then median home prices average between $220,000 and $250,000.  Most observers would consider this a "healthy' real estate market.  When those ratios start getting out of whack, specifically on the high side, then you start to have concerns about the affordability of homes.  I have historically only considered markets where the ratio is less than 3.0.   So just now I went to www.city-data.com, and checked the national ratio, and the ratio for Omaha and Fargo. The national ratio is 3.20 - significantly higher than historical.  But I'll get back to a very good reason why it is higher in a minute.  The ratio for Omaha is 2.26 - very attractive.  The ratio for Fargo is 3.71 - very unattractive.  Now this is just one measure, and there are certainly other things to consider.  Fargo may be experiencing a boom, perhaps due to the oil industry. If you like riding booms, great.  But the problem with booms is you never know when the bust is coming.  

In my opinion, the median cost of a home divided by the median household income is a BIG measure, because it incorporates so many other measuers including unemployment.   It speaks directly to the point of affordability.  A common statistical statement is that over time, everything eventually regresses to the mean.  In other words, if the market is too high, it will adjust down, and vice-versa. Since the national average is 3.2, anything below it will adjust up, and anything above it will adjust down, over time.  

I would also encourage you to look at historical trends - what has happened to the homeprice/household income ratio over time. So if you like Omaha, and you are not living in Omaha, check that out.  If you see the ratio rising, find out why.  If you see it falling, find out why.  For me, the ratio for Omaha tells me its pretty attractive.  Fargo would concern me.  I would look very closely at the trends for Fargo or simply look elsewhere.  (BTW, my wife is from Omaha - I love the city.  She is a Mercy High school girl for those of you who might care!)

Getting back to one reason the national ratio is at 3.20 - mortgage rates.  The mortgage rates have been at historically low levels for such a long period of time, that people can afford more expensive homes for the same level of income.  This drives up home prices, skewing the ratio.  So what happens when the morgage rates drop?  Fewer people can afford those home proces.  So the home prices will start dropping.  And the ratio will drop, regessing to the mean. We have a morgage bubble, causing the boom.  But busts will follow.  For the steady, long term, play, stay in markets below the national average, and ideally below 3.0.