Opinion: An Unexpected Market on the Brink of Explosive Growth (Get in While You Can!) – Wire Real Estate

Opinion: An Unexpected Market on the Brink of Explosive Growth (Get in While You Can!)




Aug 1, 2019

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I am continuously trying to improve on living in the present. It is a trait I know is vital to happiness and success as a husband, dad, and with all other relationships in my life. The reason I am trying to improve my ability to be present is because my whole life I have had the natural tendency to be a forward thinker.

This forward thinking can be focused on a month in the future or even a year, 10 years, or 50. At times, this forward-thinking attribute can be a negative. For example, when I’m sitting at a dinner with my wife or playing in the yard with my daughter, I don’t need to be thinking about what will be happening in 10 years. However, other times—especially in the context of investing and leading a company—this forward-thinking tendency can and does allow me to connect dots and see opportunities before they clearly exist.

Thinking forward, I can try to anticipate the impact of major, seemingly unrelated issues (dots) and how when connected they will change real estate investing and the opportunities that will result. When connecting the dots in this article, I will use real world examples of why these have led me to invest heavily in the Cincinnati, Ohio, market.

Here are some of the dots I will connect in this article:

  • The largest demographic (millennials) in U.S. history is entering the workforce.
  • Unprecedented student loan debt is burdening millennials, forcing net worths to all-time lows.
  • Affordable housing is a national crisis.
  • Only a third of millennials own a home when two-thirds list it as a top priority.
  • Consumers today are focused on experiences more than things (the “experience economy”).

We’ve all heard it: “Real estate is local.” And this is very true. Many times, what is happening in one local market is not the case in another. However, occasionally very large macro trends can sweep the nation and have an effect on the entire U.S. real estate market. Ask anyone investing in real estate from 2008 to 2011, and no matter where they were located, they felt the effects of the subprime mortgage crisis to some degree. Notice that the dots listed above are often the topics of news articles nationwide, in every market. Let’s connect them to find out where the future may lead us.

80MM Millennials Are Poised to Enter the Workforce

I know what you’re thinking, “Ugh, another article about millennials.” Well, yes and no. I’m writing about future macro-economic trends, and to even consider those, you have to consider the massive group of 80 million Americans born between the years of 1980 and 2000, who have been quickly pushing out the baby boomers as the largest employee base—as well as spenders—in the U.S. economy. When considering what the future holds, you must realize this group of people makes up the vast majority of the workforce. Companies including Ernst & Young and Accenture have reported that, by 2025, millennials are forecast to make up 75 percent of the global workforce. [1]

What’s more, something vastly important to note about this group is that they have a preference for working from home. In a study, ICMI found that 92 percent of millennials want to work from home. [2] This trend continues to have steady growth within organizations, as technology allows for it. Companies verify productivity metrics when working from home, and more and more millennials enter positions where they have authority to change policies like this.

In the next section, I will begin to tie together how you can adjust to position yourself and why this all has led me to invest in the Cincinnati market. Read on.

According to research released by Deloitte, the accounting and professional services giant, the net worth of Americans ages 18 to 35 has dropped 34 percent since 1996, pushing the average net worth for that group below $8,000. [3] Net worth is obviously a combination of one’s full financial picture and is affected by many expenses. Again, when looking at macro trends, what stands out as negatively impacting net worth for the group of 80 million are education costs and student loans. In the past decade, education expenses have climbed 65 percent while wages have only had modest single-digit growth.

It is common sense but worth stating, when one’s net worth decreases, they have less purchasing power and options available to them that require capital. For example, buying a home is less of an option than continuing to rent, and traveling or spending money on experiences is difficult (if not impossible) without disposable income.

I know. You’re thinking, “OK, and what should I do about it?”

I’m almost there, stick with me.

Affordable Housing Is a National Crisis

The most universal trend in housing is that we have a crisis of affordability. For the masses, it is too expensive to buy a home, it is too expensive to rent a home, and it is too expensive for builders to build affordable homes. It often doesn’t make sense for many lenders to finance affordable homes.

If you want to read more on why it’s too expensive to build new affordable housing, check out one of my other articles here.

According to HUD (Housing and Urban Development), there is a shortage of affordable housing in every county in every state of the U.S. [4] Although there are several ways of defining it, the most basic definition of affordable housing is property that costs the residents less than a third of the median income.Simply put, if the people in the lower half of the income range for the area can spend less than a third of their money on housing, it is considered affordable housing for that area. But every county of every state is lacking this type of housing.

A 2018 USA Today article noted that millennials are spending 45 percent of their income on rent. [5] Yes, 45 percent! How is this sustainable? Combine that with the student debt burden, and this group has dug themselves into—or rather, was tossed into—a massive hole that will be tough to climb out of.

If you’re thinking,”Wow, it’s crazy to pay that much in rent. Why don’t they just buy?”

The median home price across the United States reached $300,000 in March—a new record high, according to a recent report from realtor.com. [6] Meanwhile, per The Lenders Network, the average down payment when financing a home is 6 percent, or in the national average’s case, $18,000. [7]  This is over double the average millennial’s entire net worth. It’s hard to buy something you can’t afford.

Millennials Consider Owning a Home a Top Priority

Over 70 percent of millennials list owning a home as a top priority, according to Bank of America’s “2018 Homebuyer Insights Report.” [8] The only higher priority on the list was being able to retire. That’s right, both owning a home and retiring surpassed marriage and having kids as top priorities.

Have you seen the phrase “experience economy” anywhere lately? Most likely. A study conducted by Expedia and the Center for Generational Kinetics found 74 percent of Americans now prioritize experiences over products or things. [9] So basically, this massive generation of 80 million Americans that will make up 75 percent of the workforce in five years just wants to be able to live affordably and have fun experiences—despite the prospect of that happening looking grim.

millennial-wealth

Align Your Investing With What the Future Demands—Here’s How

Doing so—for me, at least—looks like investing in Cincinnati, Ohio.

When you have huge issues like affordability and student loans affecting individuals in all markets of America, affordable markets that can solve or lessen the burden of these issues will begin to thrive. Furthermore, the adoption of technology and more flexible work environments (as discussed above) may be the preparative action needed to allow that migration to happen.

I have been investing in Cincinnati, Ohio, for over a decade. For years, I told our investors/partners Cincinnati is a great cash flow market. In fact, it’s one of the best in the nation. Yields are great, and the economy is diverse and stable. However, I also was the first to say Cincinnati wasn’t a growth market. Located in the Midwest, I saw Cincinnati as what I labeled as a stagnant market. There are not a lot of ups and downs—nothing more than modest growth. If investors were looking for huge market appreciation, I told them Cincinnati wasn’t the market.

While I still agree with that to some degree, the macro trends discussed here and the forward thinking I tend to dwell on has led me to connect the dots to make investing in affordable markets like Cincinnati even more attractive. Because of the reason I will mention next, I now believe Cincinnati is a strong cash flow market and is also poised to solve some of America’s issues. It could potentially see attractive growth because of it.

And while Cincinnati is my go-to example, there are many other markets where the same investment concepts apply.

Why Cincinnati Is Ideal for Real Estate Investors

First of all, Ohio was named the No. 1 most affordable major metro in the nation and No. 7 for best recreational experiences. Here’s what else is great about this area.

Affordable Cost of Living

Cincinnati has a population of 2.2 million, according to figures from the Bureau of Economic Analysis, which released data on personal income and cost of living in 2017. [10] One of the main indicators the Bureau uses is the regional price parity (RPP) index. This index shows how the cost of living compares to the national average of the cost of goods and services. Cincinnati had an RPP of 90, which means goods and services cost 90 percent of the national average when purchased in Cincinnati. Cincinnati was the lowest among all major metros in the country, according to the government stats.

Affordable Home Prices Relative to Income

CityLab conducted a great study comparing median home sale price to the median income for all metros. [11] They put this figure into a ratio, essentially stating the average earner would have to work and save 100 percent of their income for X years to buy an average home without debt. The average was about four years. Los Angelos topped the list at 9.6 years. Cincinnati came in at 2.6 years and was the seventh lowest in the nation.

Affordable Rental Rates Relative to Income

According to the Department of Numbers, Cincinnati’s average rental rate as a percentage of income is only 15.4 percent. [12] At the same time, Cincinnati came out tops in the Smart Asset Study as the No. 1 most affordable city where renters can live alone. [13] Not only is this great for the obvious reasons as an investor and landlord, it also tells you there is room for growth. In less affordable markets, people are paying 30, 40, even 50 percent of their income for rent.

real estate, young, investor, millennials, generation

 

Diverse Jobs & Low Unemployment

With seven Fortune 500 companies based in Cincinnati and a diverse economy, the city is producing attractive jobs and keeping unemployment at 3.6 percent, which is below the national average. [14]

Ranks High for Fun Experiences & Recreation

With the trending experience economy, cities with fun recreational opportunities will continue to attract more people. Cities with the combination of fun experiences and affordable living should draw even more. According to an in-depth study done by Wallet Hub, Cincinnati came in at No. 7 on the best cities for recreation—only behind very expensive cities like San Diego, Las Vegas, Orlando, Honolulu, Tampa, and Atlanta. [15]

In the articles and data I read when putting this blog together, it was also frequently mentioned that Cincinnati was one of the only highly affordable cities with an NFL, MLB, and MLS team. [16] Combine that with the fact that Cincinnati made the list of a C+R research study citing cities that have the most craft breweries per capita. [17] Sounds like something right up millennials’ alley.

The Bottom Line

I think you get my point. When problems become large enough, people will inevitably seek out solutions. Affordable markets with a high quality of life can be a solution to some of the biggest issues facing the biggest demographic in the U.S. We have already seen this happening for years in the Southeast, but as markets like Dallas and Atlanta continue to push higher and higher in terms of affordability, they are beginning to price out buyers and renters—just like the coastal markets have in years prior.

While Cincinnati is, at the moment, a market that flies under the radar of many, you probably get my point by now—it’s unlikely that will always be the case. Making not-so-obvious connections between the macro trends and issues at hand nationwide, you can see why affordable, fun markets like Cincinnati have the potential to be highly attractive to many. With that attractiveness will likely come growth.

Even if I am completely wrong and the major problems listed are solved another way, these markets still produce great cash flow. And as an investor, strong cash flow plus good indicators for growth equals a fantastic and rare opportunity.

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