2020 will be a challenging year for investors, with uncertainty about the economy, the political situation, and international developments. Still, more people than ever are renting, and that means investors mainly need to be cautious about where and how they invest.
Dallas Texas skyline (Photo By: Education Images/Universal Images Group via Getty Images)
A big advantage for investors in Texas is that people are still moving there. In 2018, 85,000 people moved to Texas from other states, for a total population increase of 380,000. Compare that with New York, where 180,000 moved out and California, which lost 160,000.
One reason people move to Texas is because of jobs: 235,000 new ones in 2019. Another is that housing is still affordable. With the exception of Austin, home prices in the big markets are under $300,000 and in the smaller markets they're mainly under $200,000.
Throughout the country, jobs are becoming more and more concentrated in big markets and that's true in Texas as well. Our data table lists the five big markets first, then the rest in alphabetical order. Note that the big markets are also those with the highest rate of job growth.
Texas Markets 2020
I want to explain two key metrics in our table. Home Price to Income Price shows by how much actual home prices are higher then the “income” price, a calculated number closely related to local income that tells us if and by how much a market is over-priced. It's not a precise measure, but above 20%, you're in over-priced territory. The Price/Rent ratio is just the average home price divided by the average annual rent; it helps decide what kinds of investment are most likely to succeed.
Dallas. Although the Dallas market is a bit over-priced, the Price/Rent ratio of 21 is low enough to allow straight single-family rentals. Subdividing and apartments may be safer long-term bets because the rate at which home prices are increasing—4% in the past 12 months—is slowing down. In 2017, it was 12%.
The price dynamics suggest we're close to the peak of the market, so if you were thinking of selling a Dallas property, do it now. The risk of an actual fall in prices isn't very high because job growth is strong—over-priced markets can come to a soft landing—but a national economic slowdown would change that. Dallas is the financial and business services center of Texas and very entwined with national growth.
Within the Dallas market, investors in rental property have less risk in areas with a lot of renters, like Addison, Irving, Grand Prairie and Denton, and the 75204, 75220 and 75287 zip codes of Dallas itself.
Houston. Like Dallas, the Houston market is over-priced, but with a Price/Rent ratio of 21, that makes it easy to rent out single-family homes without subdividing. And the slowing rise of home prices suggests that subdividing and apartments may be better bets for a while because we could be near the peak of home prices. However, Houston didn't have as much of a boom as Dallas (price increases in recent years were around 6%), so the odds are fair that prices will continue to rise at a moderate pace.
The economic risk, on the other hand, is more difficult to calculate. The local economy features a large refinery, chemicals and energy services component that's tightly tied to the price of oil, which could go up or down depending on international developments. Long-term investors don't need to worry about this so much because long-term growth will be just fine, but during the next couple of years job growth—and demand for housing—could fall quickly during an international slowdown.
Investors will find less risk among the large concentrations of renters in Webster, Galveston, Pasadena, Huntsville, and the 77006, 77036, 77060, 77074 and 77090 zip codes of Houston itself.
San Antonio. Unlike the other big Texas markets, San Antonio has not been in a price boom and is not over-priced. The 7% increase in home prices in the past year is a marker of strong demand—for both homes and rentals—which, along with the Price/Rent ratio of 21, makes all types of investment easier: single-family rentals, flipping, rehabs to higher rents, and subdividing.
Home prices increased in the 6% to 7% range for several years because population growth has been high. The local economy features big tourism and finance sectors and a large military presence, and is less vulnerable to a national economic slowdown.
The suburbs don't have high concentrations of renters, but within San Antonio itself investors can find concentrations in the 78216, 78229, 78240 and 78256 zip codes.
Austin. This market is also over-priced but probably not yet near a peak because the rate of price increase has been steady at the current rate of 6% and job growth remains steady above 2%. The Price/Rent ratio of 22 is at the upper end of acceptable but means that straight single-family rentals, flipping, rehabs to higher rents, and subdividing are all possible.
Cautious investors may want to stick with apartments or subdividing, nonetheless, because over-priced markets always come back in line with the “income” price. There's less risk of an actual fall in home prices in Austin because of the economic stability provided by the large government sector (state government and university), but a future period of stagnant prices is quite possible.
As in San Antonio, most of the suburbs don't have large concentrations of renters that reduce investment risk. San Marcos is the best bet, but within Austin itself there are lots of renters in zip codes 78705, 78728, 78741 and 78758.
Fort Worth. This market is as over-priced as its neighbor Dallas but economically more vulnerable, with a cyclical energy sector. The Price/Rent ratio of 20 allows straight single-family rentals, but the rapidly-slowing home prices and job growth mean that investors must drive a hard bargain. Expensive rehabs are not a good idea at this point; subdividing and apartments are the best options.
Investors can lessen their risk in localities with a high concentration of renters, such as Arlington, Bedford and Euless, and the zip codes 76106, 76116 and 76132 in Fort Worth itself.
Other Markets. The table shows that job growth in many of the other Texas markets is weak right now, as are home prices, but few of them are over-priced. The Price/Rent ratio is very favorable in most, so straight single-family rentals are the best option, but—with the prospect of very modest gains in prices over the next years—investors must drive a hard bargain.
Markets with a big college presence, College Station, Lubbock, Waco, usually have more economic stability. The border markets, El Paso, Brownsville, McAllen, are more speculative right now because of the uncertain immigration and trade situation. Cautious investors will want to stay away from Odessa, in the midst of a shale oil boom that will almost certainly end in a bust.
Although the bulk of new jobs and population are in the big markets, good investment opportunities can be found in almost all Texas markets, either because economic growth is good or because home prices are very favorable for rentals.
