MSA vs city vs county historic price performance. Does it matter?

Question

This post looks at a somewhat newer investment philosophy/methodology, one that a lot of investors (and homeowners) are contemplating or embracing as housing prices and scarcity push some buyers out of the higher-priced city markets. The idea is to buy investments that are not directly in the expensive cities, but are 'close by'... as in neighboring counties. This post is single focused and looks at housing price performance and not historical data points like rental prices or builder margin. Arguably, comparing historical income streams would be more valuable, but I'll leave that for someone else or maybe I'll post later.

I'll put my commentary in for each of the four charts representing what I call the "Big 4". I obtained all this data (and charts) from the freely available Federal Reserve Economic Data (FRED) database, which obtains data from US FHFA. The gray vertical blocks are times of recession, with the latest being the GR (great recession). I tried to keep all the chart data consistent, starting with the year 2000.

Asheville is the largest city in Buncombe county. As the chart shows, the county and city housing price performance are reasonably consistent over time and outpaces the outlying areas. The housing price performance of surrounding counties has struggled to return to pre-GR levels.

Wilmington, located in New Hanover county, has on a price performance basis outperformed the greater area. The surprise to me is that Brunswick county performed better than Wilmington from 2000 until the GR. Maybe that's because of the off-the-charts Leland (in Brunswick county) growth. I put Jacksonville NC (the other large NC coastal city) in the chart as well to compare the long term housing price underperformance of this military town relative to Wilmington.

Raleigh, more specifically the RDU area, continues to perform above my expectations on a price performance level. The Orange, Durham, and Wake county performance mirrors the Raleigh-Cary MSA performance which really isn't much of a surprise. Wake county growth continues outside of Raleigh proper. The southern surrounding counties of Harnett and Johnston have historically lagged somewhat in price performance. The following table shows the counts of 2018 new construction property cards for the top dozen cities added in Wake county, showing that Raleigh isn't the only driver for development:

1593 APEX  787 CARY  467 FUQUAY VARINA  247 GARNER  318 HOLLY SPRINGS  153 KNIGHTDALE  149 MORRISVILLE  122 NEW HILL  1432 RALEIGH  793 WAKE FOREST  221 WENDELL  169 ZEBULON

In Charlotte. like Asheville, the 'play' has been in the city/county and less the surrounding counties. The city of Charlotte seems to have a big footprint in the county, hence perhaps the stronger correlation with county data.

As they say in the stock market, past performance is not a guarantee of future results. In general, from a historical price performance standpoint, counties outside of the Big 4 have underperformed the city and the county containing the city. Going forward, will this be the case? I'm curious to hear the opinions of BP Nation for each of these four scenarios.

I must admit that as I pointed out in What Macro Data Study Should BiggerPockets Provide to Investors? I'm not that much of a fan of macro housing data, simply because on a Metropolitan Statistical Area (MSA) level, city level, or county level the macro data doesn't provide me with actionable information. I will say, though, I do frequently use macro data since it may point me to the right ballpark. Well, I should say the right city that contains the right ballpark. Ultimately I want to get a preferred seat in the right ballpark, a seat that isn't in left field somewhere but one that gives me a good return on what I pay for my ticket. That trick, selecting areas, towns, and neighborhoods,...  I'll leave that for another post.

Will Kaufmann · Answer

@Chris Martin Thank you for providing this information! After reading through I have a qualitative point to make. We have, as a society, been experiencing heavy urbanization for a while now and I think that contributes to the above trends.

What happens if or when that trend changes? My guess is that the housing needs in the outer edges of the MSAs will increase with the population looking for more affordable pricing and living while still within reasonable reach of the amenities at the core of the MSAs.

What reasons may lead to a trend shift? One issue might be ultimate lack of affordability. Look at the inflation chart below, which is not moving lock-step with increasing housing prices. Additionally, wage increases have been lagging pretty substantially as shown in the second chart. There are also possibilities tangential to something like Amazon opening a huge warehouse in a city like Garner (who would've thought about that even just a few years ago?) and whatever impact that could have. Another reason: overcrowding. I also have a theory that as drone usage becomes more pervasive people will not feel the need to buy in the city to gain access to urban services (e.g., Amazon fresh/prime/etc.).

I am not beating the drum for a housing crash. My philosophy is to look at the cities and counties closest to the high-growth MSAs and provide a better housing product for those who cannot afford the core-city growth and pricing.

To directly answer your question, I think the MSA indicates that when the market eventually does correct, you could interpret the data to show that the outer areas, not the cities, should encounter less negative headwinds, based on a comparison of pre-GR and post-GR trends. What do you think?

Chris Martin · Answer

@Adam Schneider, I am not sure how much second-home vacationers contribute, but this would be a plausible reason for the price performance. I was surprised by parts of the graphs as well, which is one of the reasons for posting the charts. Like in Wake county, the more I explore 'the data', the more questions I ask. The causal questions, at least for me, are the hard questions to answer. What causes these price jumps? Unless there are just a few variables, with clear cause/effect, I stick to the results side, which is always (timewise) behind those who act and buy (accidentally or not) before big jumps. The end results become the 'answer', and next time around hopefully I find a spot where I can be in early enough to make an investment and experience a financial reward.

Clearly investing in Leland (not far from Wilmington, where I had an opportunity 5+ years ago but I didn't execute) would have been a great move. Same thing for South Park in Raleigh 5-7 years ago. I saw this unfolding... but wasn't set up for what Telegraph Road and (related) Dorothea Gardens Development were doing, and back 15 years ago The Wood Pile LLC... some of these events were not hard to see. I can say that data mining has helped put me in the right ballpark because I know what has happened and also know I had the opportunity there.

Rambling on here....

I haven't looked at acquiring anything in Wake county for over 3 years now. Busy with other stuff lately. BUT I finally upgraded my data sets. I plan on posting about some of the things I'm seeing in Wake county from a data perspective. Raleigh forum, probably. The city level and neighborhood data analysis, for me, tends to be more gratifying. Actionable data is my speed. But participating in this market remains tough for me at the moment.

Wes M. · Answer

That's a tricky question. In southeastern NC, we have tremendous growth in the urbanized portions of Pender and Brunswick County. Not so much in the more rural areas of those counties.

I'm surprised by the unflinching demand in the Cape Fear region despite two major storms in the past few years (Matthew and Florence) and drinking water quality issues associated with the Cape Fear River. It seems the quality of life on offer outweighs the inherent risks.....at least so far.

Chris Martin · Answer

@Will Kaufmann I agree with the gist of your post. Regarding "My philosophy is to look at the cities and counties closest to the high-growth MSAs and provide a better housing product for those who cannot afford the core-city growth and pricing." That basically was the premise of this post, with an analysis using FRED macro data to see what historic trends look like. So, yes, I think the idea (your philosophy) is sound. Historical price performance data shows that Wake, Orange and Durham counties mostly mirror the Raleigh-Cary MSA over the last 19 years. How much housing affordability will impact buying decisions and where is hard for me to get my head around. My gut tells me that your comment about the outer areas is correct.

Here's a kind of busy visual that looks at new Wake county building.  The chart looks at the cities listed (15 total, I think), from 2000 on, Single Family Residences only, with date identified on property card, and just the count regardless of valuation. The chart shows both the great recession drop-off and the tech crash (end of 2000 lasting a few years). The big surprise to me is that SFR buildings built in 2018 in Apex, count wise, exceeded the count in Raleigh.

Adam Schneider · Answer

@Chris Martin perhaps the mix of new/resale differs in different counties and impacts the numbers.

Paige A. · Answer

@Chris Martin - I am always drawn into your posts!  I find they're interesting, informative, and down to earth.  It's very refreshing.  Thanks!  I'm going to need to read this one a couple more times to process it fully...good stuff here!

Adam Schneider · Answer

@Chris Martin Absolutely fascinating visual! I hadn't realized how much steeper the Wilmington graph would look. I always assume that Raleigh and Charlotte will move more than the other two markets you looked at, based on the job market. A healthy job market heavily influences the R/E market, obviously. Wilmington's moves are steeper both pre and post GR. Do you think this reflects the fact that Wilmington is heavily influenced by second-home vacationers?

MSA vs city vs county historic price performance. Does it matter?

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