America is constantly sorting itself out. How we cluster--by educational attainment levels, by income, by other demographic traits, by political beliefs, even by occupational interest areas--shapes real estate markets into a present supply-demand dynamic.
And then reshapes them. Consider the next five to 10 years a stretch of great reshaping, as high housing costs, career opportunities, and a tectonically shifting economic kit of parts reassembles itself during that time period.
Recent Census data affirms a revival of longstanding macro trends of migration toward the suburbs, and, increasingly reveals outsized growth among smaller "micro" metros that dot the geography of the United States, distant from the hot, mega cities--New York, San Francisco, Los Angeles, etc.
As Millennials pour into a now highly receptive jobs marketplace, and are on pace to surpass the Baby Boom generation next year as America's largest adult population, this sorting process starts to become really meaningful when it comes to far upfront investment in residential real estate.
There's an intuitive explanation for why those "micro" markets are emerging as magnets for movers, and less obvious reasons as well.
On the more plainly evident side, the "rise of the rest" and Rust Belt renaissance phenomena reflect the momentum and ever-wider dispersal of the economic recovery. A smaller city can now pulse with vitality and promise, appealing to younger career-seekers who consider this trifecta of conditions non-negotiable--a good livelihood, attainable housing, and local culture that affords well-being.
The direct trade-off that makes either a good job, or access to decent housing options, or a vital local culture a somehow mutually exclusive choice is no longer forcing a 20-something year-old to pick one and leave the rest.
Now 20-somethings can--with some puts and takes--choose from a number of secondary and tertiary cities that bring the trifecta into balance.
This new sorting process has only just begun, but the power of it has already begun to show up in the data.
Buildzoom economist Issi Romem is doing some of the more interesting work analyzing the present and future dynamics of cities, and his latest dive into migration data can help land and investment strategists see around some corners at how both large expensive cities and smaller more affordable ones are have begun to swap out citizens and why.
Here are three high level take-aways in Romem's "Characteristics of Domestic Cross-Metropolitan Migrants," which suggests that, particularly as Millennials cross the tipping point to where they're the largest adult population, change will accelerate.
- Domestic migration across U.S. metropolitan areas is selective: in-migrants to expensive metros tend to have higher incomes and educational attainment than out-migrants, while the opposite is true in the least expensive metros. This pattern amounts to directly observing the process of polarization across U.S. metros. It also helps sustain expensive metros’ housing price appreciation above and beyond any rise in incomes.
- In-migrants to expensive metros tend to have more earners per household, be younger and less likely to own a home than out-migrants. This pattern suggests the notion of a transient class: individuals who arrive in expensive metros as young adults, but are priced out and leave at the point of raising children.
- Possible implications of sustained housing price appreciation are discussed briefly with respect to a new class distinction between owners and renters, and with respect to the long-run security of expensive coastal metros’ leading role.
Here's a particularly incisive point that illustrates the relationship of income versus wealth to the means it takes to be a homeowner.
Income and wealth are not the same. When growth in home values outpaces income growth (including due to sorting), buying a home comes to depend more heavily on wealth than on income. Thus, if sustained housing price growth in the expensive coastal metros exceeds the pace of income growth for an extended period, this could cause homeownership to become more dependent on cross-generational assistance and less dependent on within-generation income. This state of affairs would sharpen the distinction between owners and renters, aligning them more closely with socio-economic class than with people’s stage in the life cycle. It would also be consistent with a young, transient class of high-income, low-wealth individuals and households that find it difficult to put down roots in these metros.
So the question becomes, what data do you start to look at to understand where young, upward-bound strong earners who are priced-out of access to the housing of their choice in the "expensive coastal metros" will move next?
And what are the telltale signs that such a move may be coming in the year or two ahead--which is when you as a builder and or developer would want to start to engage in their "journey?"
As Issi Romem puts it:
Although the most crucial roles in these cities would be the last to go anywhere, sustained housing price appreciation could nevertheless threaten these metros’ standing. As housing costs increase, the productivity threshold beneath which jobs could no longer remain in these metros would gradually rise, sending workers from ever-higher up the value chain to concentrate elsewhere. As a result, other metro areas’ odds of achieving critical mass for viable new industrial clusters would rise, and ultimately threaten the expensive coastal metros’ lead.
Romem told me, as background into his analysis:
"Once upon a time, which cities did well in attracting young talented adults had a lot to do with natural geographic features, climate, natural beauty, natural waterways, etc. Nowadays, geographical features don't matter as much as to why someone would be attracted to a place. It has more do do with what people of strongly similar characteristics are already there."
What Romem's analysis makes clear is that there are new patterns and forces influencing young Americans' comings and goings, and picking up on those patterns and forces, sooner rather than later, will separate the successful developers and builders from those who are either very lucky or very much not around in the next half dozen years.
Give a young newly-formed household a reason to enter or to exit a market, and you've got a working, sustainable business model. Either is acceptable, as long as you intend either the coming or the going.
