Real Estate Gems

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Investment opportunities often occur when two or more demographic trends converge to create high demand for something in relatively limited supply. A single trend, such as population growth, may not cause significant asset growth unless other factors, such as income or household wealth, are also growing.

During the 1970s, for example, U.S. population growth was the same as in the 1990s. Yet the Dow Jones Industrial Average barely changed at all between 1970 and 1980, compared with the unprecedented leap during the '90s. What was different? Throughout the '70s, the highest household growth occurred in the 25 to 35 age cohort, which was almost entirely populated with below average wage earners with few assets. By contrast, in the '90s, household growth peaked in the 45 to 54 age group, which had the highest median household income and the largest number of households with a six-figure income. Considering the uncertainty in today's equity markets, it's timely to ask what might happen to various investment opportunities over the next 10 years.

From now until 2010, the fastest growing households will be age 55 to 64, which according to the Census Bureau's March 2001 Current Population Survey, have a median household income of $45,000 — 29 percent below those age 45 to 54. The older group also includes approximately half as many households with an annual income of $100,000 or more. But according to the Bureau of Labor Statistics, these older households also have the most financial assets — 40 percent more than those age 45 to 54.

Generally speaking, people with high assets but modest income look for investments that promise a high yield. The interest rate on certificates of deposit — averaging below 3 percent — could hardly get much lower, which suggests that people with assets to invest will look to equities or real estate. However, the relentlessly bad news about corporate earnings, combined with the economic uncertainty, suggest that those looking for a high return may avoid the stock market, at least in the short term. If so, we may see additional appreciation in real estate prices in those places where demand exceeds supply. The question is — where?

Sometimes high population or household growth alone will cause real estate prices to increase rapidly, but growth can slow pretty quickly or stop altogether, particularly in an area that depends on one industry. Places where real estate prices may appreciate at above average rates over the long term are areas that are not yet densely populated, but are likely to attract households with high income or substantial assets. Such places include emerging “edge cities,� large college towns and upscale coastal communities.

“Edge city� is a concept first developed by author and Washington Post writer Joel Garreau about 10 years ago. He used the term to describe centers of economic activity with large office parks that are close to a major city and one or more interstate highways or airports. The office complexes in edge cities attract firms that employ high-income professional and managerial workers. Other places that attract affluent people include college or university towns. Examples include Madison, Wis., home to both the state capital and the University of Wisconsin, and the area around Northampton, Mass., which has five colleges within a 10-mile radius.

Along the Pacific and Atlantic coasts, scenic communities from Monterey, Calif., to Newport, R.I., have a long history of attracting affluent people, and the high property values reflect that trend. The lofty real estate prices in these historically high-income areas suggest that for most investors, it may make more sense to look for areas that are more reasonably priced today, but might emerge over the next 10 years to be as desirable as those places where houses — even seasonal ones — now routinely sell for over $1 million each. Some of those places are relatively small communities in emerging edge cities, university towns or seacoast enclaves like Nantucket. There are thousands of possibilities and the small area income and education data from the 2000 census, which should be available in March or April 2002, will be useful in locating the next magnet for millionaires.

In the meantime, to begin a search for places where real estate values might appreciate at above average rates, we sorted through the more than 3,000 counties in the 48 contiguous states for medium size ones that had between 40,000 and 100,000 households (approximately 100,000 to 250,000 people), a median household income more than 50 percent above the state's median (minimum $50,000, except in New England) and a population density of less than 1,000 people per square mile.

This is a somewhat crude searching method. For one thing, it is not particularly useful in New England, where counties are very large and economically diverse. Smaller towns or cities would be the appropriate unit of analysis. But many relevant databases are available only for counties, so it is one place to start. Each of the 20 counties listed in the chart above has its own story to tell. Some are coastal counties (Marin and Rockingham), some have multiple colleges or universities (Hampshire and Chittenden), but nearly all are close to a major metropolitan area.

On the list is the fastest growing county in the U.S. during the past decade (Douglas), along with six counties where the population grew more than 50 percent between 1990 and 2000. But limited development space is what creates high real estate prices. Marin County, for example, edged up only 7.5 percent since 1990, partly because nearly half its land is in parks. Last year, the average single-family house sold for more than $750,000, with over a hundred homes selling for $1 million or more each. Perhaps there is a county on the list above, or on another list that uses different criteria, where the average home now sells for, say, $200,000, but in a decade or so, that same dwelling will fetch $800,000. Not a bad investment, and perhaps a pretty good home as well.

EDGE COUNTIES?

These counties may see an appreciation in real estate prices. Douglas, the fastest growing county, saw a 191 percent population surge over the past decade.

COUNTIES 2000 CENSUS POPULATION PERCENT INCREASE 1990-2000 NEARBY METRO
Douglas, CO 175,800 191.0% Denver
Loudon, VA 169,600 96.9% Washington, D.C.
Williamson, TX 250,000 79.1% Austin
Hamilton, IN 182,700 67.7% Indianapolis
Delaware, OH 110,000 64.3% Columbus
Cherokee, GA 141,900 57.3% Atlanta
Williamson, TN 126,600 56.3% Nashville
Shelby, AL 143,300 44.2% Birmingham
McHenry, IL 260,100 41.9% Chicago
Warren, OH 158,400 39.0% Cincinnati
Washington, MN 201,100 37.9% Minneapolis-St. Paul
Hendricks, IN 104,100 37.5% Indianapolis
Livingston, MI 157,000 35.7% Detroit
Howard, MD 247,800 32.2% Baltimore
Washington, WI 117,500 23.3% Milwaukee
Hunterdon, NJ 122,000 13.2% Philadelphia-Trenton
Rockingham, NH 277,400 12.8% Boston
Chittenden, VT 146,600 11.2% Burlington
Marin, CA 247,300 7.5% San Francisco
Hampshire, MA 152,300 3.9% Springfield
Source: Census 2000 and Peter Francese analysis
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