Is Northwest Arkansas a bubble?

Question

Would like some opinions on if anybody else thinks NWA will be insulated from the change in tide of the housing market as of recent. Living here I always here something along the lines of... "Oh we have Walmart, Tyson Foods and JB Hunt. It will slow down here maybe a little but still stay a hot market because NWA is invincible."

Does anybody else have thoughts on this are of the country for the coming months?

I of Course have my own opinions but want to hear what you all have to say.

Does anybody else have thoughts on this are of the country for the coming months?

I of Course have my own opinions but want to hear what you all have to say.

Ryan Blackstone · Answer

I agree with @Nathan Grabau. We still can't seem to solve the supply issue that we have. We have around 11k people moving into NWA a year. We sell about 13k houses a year. Our builders can only  build 6k-7k houses a year. With millennials, the biggest generation, now buying houses it increases the demand. This means we are no where close to meeting demand.

For the first two years after covid began, we had less than 500 houses active at any given time. Now we are at 961 homes active as of today. We have been increasing the number of actives by 100 a week. We need to get to 4k-6k actives to maintain a normal market. If we continue going at this pace, it will take us 8 months before we get back to a normal market. Now, this doesn't mean prices are going to go down, just that homes will take longer to sell on the market.

Buyers have been overqualified for the homes they have been purchasing. The number of homes that have been purchased in cash has gone up tremendously, and those who leveraged, got great terms that will probably make them stay put in this interest rate increase market we are in. Sellers deciding not to sell in a market like this, just means a reduction in supply.

The two very big things that I have heard that makes me worried is: 1. Buyers cant afford the house of their dreams so they are turning to 3:1 arm loans to buy their primary home. 2. Some of the "cash" buyers are actually leveraged with risky loans. These risky loans could cause for an increase in inventory a couple years from now.

To really answer the question, I don't want to be naive to think that we are totally insulated from the rest of the nation. However, we were a lot better off than the rest of the nation back in 08. Prices went down, but far less than the national average. We also recovered way quicker. This is mainly due to Arkansas not allowing some of the bad financial products that were out there.

So, I feel really good about investing in NWA. Just think of it, even if we dropped by 24% of sale prices, that just puts us back to where the prices were last year. You never lose unless you have to sell, and so making sure you can pay for your expenses is always a key to risk management. Any problem in the market, we should always see as an opportunity. Plus real estate is most always a long term play. So onward we go!

Mark Caiazza · Answer

@Zachary Stanley The #1 driver of real estate prices is population growth, the #1 driver of population growth is jobs, which is why you probably always hear people touting Walmart, Tyson, JB Hunt, and University of Arkansas. The diversity of these industries also provides stability that you don’t see in other markets. In my opinion, NWA may not be completely insulated from a housing market downturn, but fundamentally much better off than a tech, leisure, or energy focused market.

I don’t have accurate data on this next point (I’m curious if some of you NWA realtors have it @Ryan Blackstone), but one thing that stands out to me is the percentage of homes purchased by investors seems to be relatively high compared to other cities. I’d be interested to see how NWA compares to cities like Vegas, Atlanta, Charlotte, Jacksonville, and Phoenix, where roughly 30% of homes are being scooped up by investors. Although it increases home prices drastically, it seems to be keeping rental prices subdued (still rising, just not at the pace of other areas) due to the competition. If investors start backing out you may see home prices soften.

Sprawling has been picking up rapidly in NWA over the past decade and it will be interesting to see if city planning can keep up with transportation development as the area grows. Rural/suburban areas like Centerton, Cave Springs, Elm Springs, and Farmington are showing massive growth, but it is yet to be seen whether its haphazard development or sustainable planned growth. Will big business investment grow to these areas or will they remain commuter towns? This goes back population growth and jobs… if you see more business investment in these areas, the fear of a bubble should subside.

Another potential concern is homeowners that have gained insane equity over the last 3-5 years have been trading up for new construction or more space, but keeping their property as a rental. This is restricting supply and driving up purchase prices. These individuals that weren’t cut out to be landlords may begin to sell those properties over the coming years, which may increase supply. Also, they may get nervous and want to cash-in on their equity if a recession hits.

That’s just a couple of my observations/opinions on the area, but I’d love to keep this conversation going and get some more perspectives as NWA will be my primary investment focus in the coming years.

Ryan Blackstone · Answer

I just want to make one more comment after thinking of this. Most of what I talked about was logical and analytical. However, humans are emotional and not always logical. As I still stand by what I said earlier I want to throw some technical analysis in with the fundamental analysis. If we  panic and let out emotions believe we are going into a crash, then we will bring it into existence. It could only take Sellers selling at a discount because they think the worst is yet to come, or buyers to say " I don't want to buy at the top." To make it happen. A self fulfilling prophecy.

I am concerned with consumer debt that is going up across the nation. It's like people got used to living a certain life style and now they are just trying to maintain. Overall, my actions are the same: keep prospecting, and keep buying.

Nathan Grabau · Answer

My biggest concern with bubble conversations is that we do not have a structural issue currently. Most home owners either own the home clear, have tons of equity, or have a very low rate. 2008 popped in part because people lost an incentive to hold onto their properties because theirs arms adjusted up and foreclosing and finding a place to rent became a better cheaper option or people felt so far underwater.

If the market had a really high volume I would be worried, because lots of people would be buying at today's prices, but volume is so low that very few people are overleveraged, even if there was a minor pull back.

Brian Wagers · Answer

100% think its insulated from a "bubble". Not that we will have a "burst"

Like other red states that prevailed through the pandemic and were less hurt during the 2008 recession  . If you look at it from a macro point these states will have another layer of insulation (select markets in TX, OK, and sunbelt states) .

NWA, like other areas, has a continued huge need for housing. On top of that we have other economic drivers that you mentioned on the corporate side with Walmart and "vendorville" . There may be a correction or slow down but don't see any burst here.

I have been investing here for the past 6 years and have bought and went full cycle on over 500 doors here and just went under contract on another 350+ unit apartment community to tell you how much I believe in the area...

Ryan Blackstone · Answer

@Mark Caiazza Man, I can't find the article, but I will look for it. It was either connected with the Skyline Report or talk business; however the article said something about how the number of Institutional investors in nwa have increased to 17% or so. Like you mentioned, I believe a lot of these other institutional investors make up 30% of the market. So, They comprise a lower percentage than us. I do think the number should be going up over time.

If I had to predict home prices for 2022, I would say we should increase in home prices between 7-11%. 7% would put us as a normal market, assuming inflation will end the year at 7-8%. The truth is when inflation was just above 3%, which was pre-covid, we were seeing prices increase around 11%. Since covid, the past two years have been at 24-28% per year. Which makes since when you take in the 11% that we were at before plus inflation plus and increase in demand as we are now on the public stage of the US. We haven't made it to the top 100 largest areas in the US however, I think we are 104 or 105. We are one of the fastest growing.

I am currently tracking salary increase and overall number of jobs increasing or decreasing over the next couple months. I know in NWA average household income has increased drastically.

Is Northwest Arkansas a bubble?

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