An article I wrote named Real Estate Market Valuations: Predicting Downside Risk, A Back Study, describes the methodology and rationale for using market valuation metrics as predictors of downside risk. Another article, Is the U.S. Real Estate Market Overvalued? shares the current state of valuations across U.S. states and top 100 largest cities.
It is important to know, that absent knowledge of market valuations, one would not be able to pick time horizon to determine relative price appreciation, or 'market strength' across regions.
I illustrate this point below, as well as share what have been the best performing U.S. real estate states and large cities during the current market cycle.
The Case for Fair Valuation-Current Price Performance, State-level Data
Below is the peak-current price change for U.S. states since the peak that preceded the Global Financial Crisis ~ 2007 until Oct 2020. One may assume we are sufficiently forward in the market cycle (from an years count perspective) where robust markets would have exceeded their earlier peak, and ones that didn't or are close to it may be deemed too volatile, or not robust over the long run. Such is the case for California, Nevada, Arizona, Florida, which all barely exceeded there ~ 2007 peak in prices.
Below is the price performance for U.S. states through Oct 2020 and since the first time they were fairly valued (or as close as possible to that), post reaching their price bottom following the Global Financial Crisis. it is hereby referred to as fair valuation-current price performance.
Relative performance across states looks pretty different versus the one in the peak-current price change map. It is also much more in line with the general investor narrative of U.S. real estate having grown the most to the West and South during the current market cycle, and where institutional capital is flowing.
The article named Real Estate Market Valuations: Predicting Downside Risk, A Back Study, showed that the states of California, Nevada, Arizona, Florida were in fact the top four overvalued states at the peak preceding the Global Financial Crisis. Their valuation at the time was thus distorted, and not a good starting point to gauge relative price performance versus other regions.
The above illustrates the need to know historical market valuations, in order to be able to properly assess relative market strength, price performance. Such should be gauged since a time point when they were fairly valued, ideally the first such time point following a major market downturn.
Best and Worst Performing U.S. States, Current Market Cycle Since Fair Valuation
Below are the top 10 best and top 10 worst performing states during the current market cycle, when accounting for when they were fairly valued post their bottom following the Global Financial Crisis.
The states of Idaho, Oregon, Colorado, Washington, Arizona are at the top of the best performers list, while Connecticut, Illinois, Mississippi, West Virginia, Alabama head the worst performers one.
It seems little surprise, that Western States, plus the states of Texas and Florida are in the best performers list, while Northeast, Midwest, and lower household income Southern States in the worst performers one.
Best and Worst Performing Large U.S. Cities, Current Market Cycle Since Fair Valuation
Below are the best performing and worst performing cities in the U.S. Top 100 largest cities, based on county-level price data as of YE 2020.
Boise was the best performing city in the U.S. this market cycle, followed by Aurora, Denver, Austin, Miami, Hialeah, Seattle, Phoenix in the top 100 largest cities. The best performing list is comprised of cities in Idaho, Colorado, Texas, Florida, Arizona, California states. Also Seattle, Reno in Washington, Nevada states.
Toledo was the worst performing city out of the top 100 largest cities this market cycle, followed by Chicago, Cleveland, El Paso, Detroit, Norfolk, Anchorage. The worst performing list is comprised of cities in the underperforming states of Ohio, Illinois, Michigan, Virginia, Maryland, Louisiana, Wisconsin at the bottom. Also some cities in stronger performing states, namely El Paso, Laredo in Texas, as well as Greensboro, Winston-Salem in North Carolina.
It is necessary to have a history of market valuations, to property gauge relative price performance or market strength. Price performance to be gauged starting at a fair valuation time point.
Idaho, Oregon, Colorado, Washington, Arizona are the best performing states so far this market cycle. Connecticut, Illinois, Mississippi, West Virginia, Alabama the worst performing ones.
Boise, Aurora, Denver, Austin, Miami, are the best performing large cities so far this market cycle. Chicago, Cleveland, El Paso, Detroit, Norfolk are the worst performing ones.
Federal Reserve Bank of St. Louis, Federal Housing Finance Agency, Bureau of Economic Analysis
About the Author
Stefan Tsvetkov is the founder of RealtyQuant, a company that brings data-driven and quantitative techniques to the real estate industry. On a mission to add massive industry value through education, investment, technology, and analytics.
Financial engineer turned multifamily investor, analytics speaker, and live webinar host. He holds a Master's degree in Financial Engineering from Columbia University, and during his finance career managed ~ $90 billion derivatives portfolio jointly with colleagues.
Featured on multiple Podcast and Webinar events including InvestUp, Best Ever Real Estate Show, Discovering Multifamily etc. Organizer of Finance Meets Real Estate live webinar series.