Changes in home prices give us the best idea of what’s going on in a local real estate market. But you can’t just take price increases at face value and think that bigger is better. Home prices can be increasing at a good clip for three main reasons, two of which are not friendly to investors dealing with rental properties:
At the low end, prices can rebound in a depressed market.
We saw that a few years ago in pretty much every one of the 330 markets that Local Market Monitor follows. The rebound doesn’t last very long, however, unless something has fundamentally changed in the local economy.
At the high end, prices can be in the middle of an unsustainable boom.
You might get another few years of price increases, but you also might get one almighty crash.
In the middle, as Goldilocks might say, prices can increase at a level that is “just right.”
Local Market Monitor’s list of top 10 markets this month includes markets in the just-right range. According to the Income Price indicator, these markets are neither depressed nor in a boom. According to job growth, the local economy is doing well. Home prices increased at a good rate in the past year (and more than in the previous year) but not at an alarming pace. No guarantees in real estate, but these are markets where an investment in rental property is a good long-term bet.
Income Price: A calculated value that shows where home prices should be according to local income. Income price metrics are used to help determine whether a market is over- or underpriced and are based on data from the FHFA Home Price Index and the Bureau of Economic Analysis. Local Market Monitor developed this metric.