Will All Major Cities Eventually Become Over-valued?

Rental Property Investor · Salem, NH · Member since 2016 · 460 posts · 276 votes

I am young at 24 years old and do not have much experience in real estate and the cycles that the markets inevitably go through.

Some things that I have noticed are that we see some very over-saturated markets such as Boston, New York, San Diego, San Francisco, etc. where the prices are extremely high (compared to the average) and we see much smaller and less-saturated markets such as Nashville, Jacksonville, Charlotte, etc. where prices are low or at the average.

Will there be a day when all of these other markets catch up and eventually become over-saturated? Will these low prices not last forever as we see more and more investor action or will there always be other major cities out there that provide more opportunity?

Just some thoughts :)

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Christopher Brainard

Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes

@Steve DellaPelle

Prices in Nashville will never be the same as New York, however, any market can get saturated regardless of the price point. In my opinion, every market has a 'base' value, which is created by non investors, and driven by their personal needs, their income, where they want to live, the economy, the weather, fear, etc. Areas that have little land and are in high demand will always carry a premium over places with ample land or that aren't as desirable.

The investment community then applies a bias on top of that, either negative or positive, which further drive the pricing. Right now, I think the investor bias is very high which reduces the overall number of great opportunities. When a deal becomes available, you can almost guarantee that a hundred other investors are also on top of it. As long as the base values keep going up, I expect this to continue. Once base values start to fall and the investors start looking to jump ship, we'll probably see a small correction in prices.

-Christopher

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Christopher Brainard
Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes
9y
@Steve DellaPelle
Prices in Nashville will never be the same as New York, however, any market can get saturated regardless of the price point. In my opinion, every market has a 'base' value, which is created by non investors, and driven by their personal needs, their income, where they want to live, the economy, the weather, fear, etc. Areas that have little land and are in high demand will always carry a premium over places with ample land or that aren't as desirable.
The investment community then applies a bias on top of that, either negative or positive, which further drive the pricing. Right now, I think the investor bias is very high which reduces the overall number of great opportunities. When a deal becomes available, you can almost guarantee that a hundred other investors are also on top of it. As long as the base values keep going up, I expect this to continue. Once base values start to fall and the investors start looking to jump ship, we'll probably see a small correction in prices.
-Christopher
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Steve B.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
9y
Most of the San Francisco "real wealth" investors believe in the "perpetual appreciation theory" so they say it's always a good time to buy, even with negative cash flow because it will always go up.
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Steve DellaPelle
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Rental Property Investor · Salem, NH · Member since 2016 · 460 posts · 276 votes
9y
@Christopher Brainard Is it possible that these markets like Boston, NY, San Fran, etc. become profitable again, with a correction to their base values? Or do they at least remain constant/rising because of their location, economy, etc. ?
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
Originally posted by @Steve DellaPelle:

@Christopher Brainard Is it possible that these markets like Boston, NY, San Fran, etc. become profitable again, with a correction to their base values? Or do they at least remain constant/rising because of their location, economy, etc. ?
Too many variables for anyone to say with any kind of certainty. There are people making money in those places now so you can't say that they're "unprofitable" today. As long as there is demand greater than available supply, prices will rise. In theory there's a cap as to how high prices can rise anywhere, but as long as cash continues to flow to markets you'll have upward pressure on prices. I am wholly unfamiliar with San Francisco, but I have had other investors tell me a lot of Chinese investors have bought there, pushing up prices, as well as wealthy people looking for a second home or a place to park investment funds. So the prices don't have to even be related to local economic conditions.
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Travis Dawson
Investor · Moscow, ID · Member since 2017 · 107 posts · 76 votes
9y
@Steve DellaPelle when a correction happens those markets will dip, but probably not to the same extent that a midsize or small city will. But its logical to assume after a dip prices will rise again and likely go even higher.

As long as those places are desirable real estate prices will increase due to great demand on finite space.
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Steve DellaPelle
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Rental Property Investor · Salem, NH · Member since 2016 · 460 posts · 276 votes
9y
@JD Martin @Travis Dawson
Thanks for replying!
I am always curious seeing these "new" markets pop up and I can't help but wonder why we wouldn't see all major cities eventually become an investor friendly area.
Why are markets like Nashville, Dallas, etc. suddenly becoming great markets to invest in? Why won't we see this happen in other parts of the country?
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Christopher Brainard
Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes
9y
Originally posted by @Steve DellaPelle:

@Christopher Brainard Is it possible that these markets like Boston, NY, San Fran, etc. become profitable again, with a correction to their base values? Or do they at least remain constant/rising because of their location, economy, etc. ?
I don't really view these areas as unprofitable, however, you need to be careful and very selective about what you invest in. I think the days of randomly buying anything and making a killing are gone.
I personally expect that over the long term values will increase. In the short term I expect some sort of mild correction.
-Christopher
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
First thing to understand is demographics and trends. There has been a North>South, East>West trend for about the past 30 years, as retirees move, those who have mobility attempt to escape higher costs of living, etc. At the same time the US has continued to see positive net immigration levels, and those individuals are more commonly drawn to the biggest metro areas for opportunity and assembly in community (ie there are Vietnamese communities where you don't have to speak English in the SF area, but not so much in Waco, Texas). Finally you have changing tastes of millenials, who often grew up in suburbs but as DINKS prefer urban living.
I would say that by definition, a "major city" is already an investor-friendly area. The city couldn't become major otherwise.
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Travis Dawson
Investor · Moscow, ID · Member since 2017 · 107 posts · 76 votes
9y
@Steve DellaPelle
Nashville and Dallas are hot markets to invest in for a lot of reasons, but the overarching thing is they are considered "cool" cities to be in. This drives young professionals in droves.

It could happen in other parts of the country, and will. Eventually the job markets of Dallas/Memphis/Nashville/SLC will cool a bit and prices will be high enough that college grads will look to other cities and the process will repeat itself.
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Steve DellaPelle
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Rental Property Investor · Salem, NH · Member since 2016 · 460 posts · 276 votes
9y
Yes, it seems very important to stay on top of these different trends which are always changing. I am planning to house hack for somewhere between 1-3 years and then I would like to start expanding in out-of-state rentals or flips as I am in the Boston area and the potential seems to be better elsewhere.
Thanks again for your insight everyone!
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Anthony GaydenPro Member
Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
9y
Steve DellaPelle I see these smaller markets becoming more popular as a direct result of the more expensive coastal markets. Lower taxes, lower property costs, and less regulation sent people and businesses running to these smaller metro areas. These areas will never be as expensive as the coastal big cities because they have few barriers to growth.
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Account Closed
Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
9y
It mostly has to do with jobs. There has been some recent research about how new jobs are being concentrated in areas of existing jobs and the impact on real estate markets.
Increasing population also seems to start a feedback loop of ever increasing values and investment.
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Bill Manassero
Rental Property Investor · Mission Viejo, CA · Member since 2014 · 230 posts · 113 votes
9y
There really is no such thing as a national housing market. There may be national trends and recessions but the housing market has always been and will always be regional.
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Account Closed
Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
9y
@Steve DellaPelle In the late 1950's and early 1960's Detroit was the wealthiest "per capita" city in North America.
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Sam Van Horebeek
Hong Kong, Hong Kong · Member since 2015 · 140 posts · 89 votes
9y
@Steve DellaPelle Agreed with all the feedback given so far. One important item that you should first figure out is your risk/return ratio. How much risk are you willing to take for what amount of return? The higher the risk, the more return you can achieve with any investment, including real estate investment.
San Francisco, New York, Boston,...are considered to be 'safe' cities with long-term appreciation and relatively low risk. These cities will not have a high rental return though (but appreciation will be/should be there). This is because they are large metropolitan areas with diverse industries, attracting many people to work and live there, etc.
Other cities such as Detroit, Houston, Dallas, .... also offer some interesting investment options as the rental yield can be higher (compared to some of the coastal cities) but then you may have to consider issues such as decline of population, less diverse industries, more land available,....
As such, determine your budget and risk/return profile - that should help you greatly in narrowing down to a few cities. Good luck!
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Gregory B.
Brooklyn, NY · Member since 2017 · 68 posts · 28 votes
9y
Steve, I can't speak about Boston and SF, but New York is certainly not unprofitable. The way you make money in NY is appreciation and value adding, usually from the legal side by deregulating units or raising regulated units rents. This takes capital up front to do, but you will see greater returns in shorter periods of time, but cash flow from the properties May not be therefor the average persons purposes. There is a reason most institutional investors invest in NY.
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Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
9y
Originally posted by @Sam Van Horebeek:

@Steve DellaPelle Agreed with all the feedback given so far. One important item that you should first figure out is your risk/return ratio. How much risk are you willing to take for what amount of return? The higher the risk, the more return you can achieve with any investment, including real estate investment.
San Francisco, New York, Boston,...are considered to be 'safe' cities with long-term appreciation and relatively low risk. These cities will not have a high rental return though (but appreciation will be/should be there). This is because they are large metropolitan areas with diverse industries, attracting many people to work and live there, etc.
Other cities such as Detroit, Houston, Dallas, .... also offer some interesting investment options as the rental yield can be higher (compared to some of the coastal cities) but then you may have to consider issues such as decline of population, less diverse industries, more land available,....
As such, determine your budget and risk/return profile - that should help you greatly in narrowing down to a few cities. Good luck!
Ummm...Dallas as a metro area is probably the 'safest' of the cities you mentioned in terms of growth and long term appreciation. The metro area is one of the fastest growing the country. It benefits from having one of the largest airports in the country, is a main line in the corridor of trade with Mexico. Has one of the largest high tech industries in the world. Many many large companies are moving their headquarters or large divisions to DFW including Toyota, State Farm, Capital One etc etc. It is a highly diverse metro area, has business friendly regulations and a highly educated workforce with low costs and low taxes.
There is no question in my mind that the Dallas Metro area is a long term appreciation play. Maybe in the short term we will get a small pullback in prices. But 30 years from now, the Texas and especially Dallas demographics are some of the best in the country.
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