Thirty-eight real estate markets have been tagged as “dangerous” for investors looking to make money on buying homes as rental properties in new quarterly data compiled by HomeVestors of America (known as the “We Buy Ugly Houses®” company) and Local Market Monitor.
The list categorizes markets according to different investor risk preferences and assigns a numerical score from minus-ten to plus-ten based on population, job growth, unemployment, home price changes, the market’s equilibrium home price (a proprietary measure of how much a market is over-priced or under-priced relative to local income) and the 12-month home price forecast.
“Despite the fact that home sales and home prices are increasing on average across the country, we are still seeing weaknesses in some markets,” said Ingo Winzer, president and founder of Local Market Monitor. “Sometimes weaknesses can signal opportunity for real estate investors, but not in the markets we ranked as ‘dangerous.’ In those markets, the risk far outweighs any opportunity.”
Leading the “dangerous” list is Battle Creek, Michigan, which drew a minus-four score because of its continuing job losses and weak home prices. Battle Creek is one of three Michigan cities—the others being Muskegon and Saginaw—that were ranked as “dangerous.” Only Florida had as many cities ranked as “dangerous” as Michigan. They are Port St. Lucie, Daytona Beach and Tallahassee. The top ten “dangerous cities were, in order, Battle Creek, Salisbury (MD), Norwich (CT), Dalton (GA), Muskegon, Augusta, Decatur, Tuscaloosa, Dover and Port St. Lucie. The largest city to earn a “dangerous” label was Providence, Rhode Island, which ranks as number 26 on the “dangerous” list.
“All of the markets we ranked as dangerous have a combination of factors such as high-unemployment or weak job growth and falling or weak home prices,” said Winzer. “For investors with an appetite for risk, ‘speculative’ markets could represent some significant upside potential,” explained David Hicks, co-president of HomeVestors. “These markets typically have weak home prices but improving unemployment numbers combined with some job growth and in some cases population growth, factors which make them attractive.”
But HomeVestors co-president Ken Channell recommends that investors do their homework to find the right investments in these markets. “What we have learned in the last 16 years in buying more than 50,000 houses allows us to analyze individual neighborhoods for sales trends and rental rates,” Channell said. “This information can help investors determine a purchase price for a property that will allow them to build equity over the long term while generating rental income immediately.”
According to the data for the first quarter, three of the top-ten “speculative” markets by population that investors should be looking at are in New Jersey-- Edison, Newark and Camden. The others are Philadelphia, Nassau (NY), Cleveland, Detroit, Milwaukee, Jacksonville, and Hartford. Major population centers also dominate the top ten list of “medium risk” markets which features four California cities—Los Angeles, Riverside, Santa Ana and San Diego—along with New York City, Chicago, Atlanta, Minneapolis, St. Louis and Tampa. Texas dominates the list of top 10 “low risk markets” with Houston, Dallas, Fort Worth, and San Antonio in first, third, seventh and eighth place respectively.
Other cities in the top ten in the “low risk” category are Phoenix, Washington DC, Seattle, Denver, Boston and San Jose. Winzer noted that each of the factors considered in the ratings contribute to the overall score for a local market, but home price changes and the equilibrium price have the largest effect with job growth being the next most important factor.