US Residential Real Estate Metro Area Valuation Rankings, June'21

[Scott Shander]

New member to BP here.  I wanted to share some fundamental econometric analysis I have been working on, objective valuation for all US metros.  Below is the output of the latest valuation rankings relative to median sales prices.  

The ten most undervalued residential real estate markets for June 2021: Florida and North Carolina account for 70% of the top ten markets. These can be primarily attributed to relatively attractive Price-to-Rent ratios (FL) and tight inventories (NC).

For the full list and the article on methodology, check out thevalueportfolio.com

[David Song]

Nice analysis. The methodology used is probably only useful for rental income cash flow investors. The market price of SFH is governed mostly by supply and demand, and comparable, not by rental income.

In a market with limited land supply and strict zoning governance, the supply is reduced. If job market in such market is good, the demand will overrun the supply and cause price appreciation. Therefore, investors catch those opportunities to win big on the price appreciation side.

In a market with unlimited land supply and loose zoning governance, the supply is more plentiful. Therefore, that oversupply limit the price appreciation in such markets. 

For example, in SF bay area, the supply is limited due to no available land within the SF peninsula area. Most of the new development is infill projects or conversion of industrial/office to residential. Almost all open lots from San Francisco to San Jose are already built up. 

To the contrary, in another market where land is plenty (e.g. texas or florida), there is no such geographical limitation. Whenever there is new demand, developers can easily find large parcel of land to build and meet those demands. Therefore, the price increase in those markets are suppressed by the additional supply.

Therefore, the valuation method seems to reply mostly on rental income, which can provide some information for investors seeking to invest in SFH. However, they also need to understand that those market will likely have a slower appreciation rate.

As an investor, the ultimate goal is to achieve high appreciation along with consistent cash flow. As such, my belief is that the market price in any given local market within the US is probably the fair representation of its valuation, considering both future appreciation and current cash flow.

A retrospective mathematical modeling of the past performance of various major US markets might be interesting. In other words, assuming we go back 10,20 or 30 years and invest the same amount of money in various market, what kind of cash flow and appreciation an investor would have made. In that case, you have the retrospective actual data, rental rate per year, price per year, etc. 

Even though I have not done that yet, my gut feeling is that CA investors during the last few decades, even with initial lower cash flow, their final outcome is likely far superior than any other states.

Within CA, SF bay area probably has the higher return of capital.

For the future, where to invest is the million dollar question. Every one can pick own market and decide for themselves.