Dave:
Today we are breaking down the number one metric that predicts real estate growth. Our in-house analyst, Austin Wolff, has found that tracking job growth can reveal where home prices and rent prices are headed often long before anyone else. And if you’ve been burned by guessing market potential, this data-driven approach could change how you invest. I’m Dave Meyer and welcome to On the Market. Let’s dive right into today’s topic with Austin Wolff. Austin, welcome back to On the Market. Thanks for being here.

Austin:
Happy to be here.

Dave:
Tell us a little bit about the project that you’ve been working on and what we’re going to be going into today.

Austin:
Yeah, so I spent a lot of my time on this show and in articles talking about one specific metric, and I usually always lead with this metric, but I rarely explain why I lead with it. And in my opinion, this is the number one metric that investors should be looking at when they’re comparing different markets. And to me that’s job growth.

Dave:
So generally your hypothesis here is that for a good real estate investment, you need a place with increasing demand. So you want more people who need to buy homes or to rent apartments. For that you generally want population growth or household growth. And if you take a further step out and say what’s going to predict that demand, you’re saying it’s jobs, people are going to move to where jobs are.

Austin:
Yeah. If we look at, I hate to use this example because it’s overused, but the most dramatic example is Detroit due to the manufacturing offshoring that occurred. Detroit has been losing population over the past 50 years. Last year is an exceptions. The first time in 50 years it actually gained population.

Speaker 3:
Wow.

Austin:
But yeah, that’s because the industries are starting to diversify and attract new talent to the area, but it took 50 years of decline for that to happen. So it is all about supply and demand. You could have a city like Los Angeles where we’ve actually had a decline in the number of jobs over the past three years because of the California exodus, but there is still a massive shortage of housing units. And so even if some demand leaves, this lack of supply is still going to push prices up. So supply and demand, both of them need to be taken into an account. The only reason I want to say that is let’s look at Dallas-Fort Worth. It’s essentially one of the largest metro areas in the country and they continue to add more employees there each year, almost more than any other place in America.
However, it’s very sprawling. It’s very easy to build there, and so they have an easier time keeping up with this demand. So even though they’ve added many more jobs than most places in America, they have relatively been able to keep up. So prices there continue to appreciate, may not appreciate as much as other places like Los Angeles that have that constraint on supply. So there is a yin and the yang between demand and supply, but to me, demand is the leading indicator. If you have jobs going into an area, you’ll have an increase in population and then eventually household growth as well as maybe families have kids, those kids move out, or you have people my age that have roommates and then they split up and eventually get their own houses leading to household growth.

Dave:
Okay. Yeah. So that’s a really important thing I think that everyone listening needs to take note of. When we talk about jobs, we’re talking about the demand side of things, which is how many people want these houses, how many people want to rent an apartment? And that is super important, but we do need to talk about supply. We’re probably not going to get into that much today, but just keep that in mind that just because a market has strong demand does not necessarily mean that prices are going to go up. You have to look at the other side of the equation. Austin just gave some examples, but also just say Austin, Texas is the opposite example where there’s too much supply, there’s fantastic demand there. Job growth there is super strong. You can’t just look at one or the other. But for the purposes of this episode, we’re going to talk mostly about jobs because Austin’s done all this research here. So Austin, you hear a lot of different theories and reasons why a city might grow. So is there a way you can measure the fact that it’s jobs? Is this like a theory or how are you coming up with this idea that jobs is kind of the key thing to hone in on?

Austin:
One thing that you want to look at, if you’re trying to see which variables influence, another is measuring correlation, and that is measuring the strength of the relationship between two variables. So what I did is I took data from CoStar and you’re able to take a look at price growth throughout time. So I measured from the year 2000 up until today. And if you take price growth out of all these metrics, you can measure rent, growth, population, job growth, which of these metrics have the strongest relationship to price growth as one goes up, which one pushes prices up the most? It turns out two variables come on top and they’re market specific. This does not apply to all markets, but the two variables that had the highest impact on price growth was office employment. So white collar jobs and household income. And for my data nerds out there, that correlation coefficient with 0.7,

Dave:
Yes, for our feral nerds there, Austin, and I’ll appreciate this, but everyone else should just know that means they’re closely related. But one question I have about this is when we look at this data and you measure these things and you do the math, you’re using historical data, and I’m curious if anything has changed because we’re in a new world where a lot more people work remote. I don’t think we’re going back to pre pandemic levels of in-office time. Personally, you look at the number of days worked remote, it’s sort of stabilizing. If you just read the headlines, you think everyone’s going back to the office. But if you actually look at the data about how many people are working from home, it’s pretty stable right now. So do you think that this correlation because you’re using historical data, holds true and is predictive of future results or is this kind of just a summary

Austin:
Of what used to happen? So that is one trend that we have actually seen over the past few years is the amount of people moving because of work has been falling. One reason why that might occur is because prices are high, mortgage rates are high and the opportunities to work remotely are higher than they were in the past. What that might mean is that you’re right, this correlation may not be as strong in the future, but I’m glad you brought that up because I don’t think we’re going to have one to two to three to four markets that just see explosive job growth and then everywhere else doesn’t really see that much growth. I think the playing field is going to be somewhat more leveled over the next decade. However, I do think that the majority of roles still require hybrid or in office presence. So I do think that job growth still is probably an important metric to measure. Now that being said, that second variable was household

Speaker 3:
Income.

Austin:
So even if everyone works remotely, what you might want to start tracking then is the median income growth across households across all markets because as people earn more money, they can afford to pay more for a certain desirable house in a desirable neighborhood, in a desirable school district. So job growth, yes, I still think you should still be measuring that, but maybe you also want to measure income growth as well.

Dave:
For the record, I totally believe that job growth is probably the most important thing and people might say, shouldn’t population growth be more important? And you can make that argument, but job growth often leads to population growth. The lead indicator here, the thing that sort of sets everything in motion is when there are jobs coming to an area, people will start to move there or people will continue to stay there and the population will stay higher because there are continued opportunities there. So I just wanted to talk about some of the caveats before we dive into some more of the data here. But just on the record, I totally agree with you on this. Coming up we have more insights on why job growth is essential to predicting markets. But first, a quick break. Stay with us. Welcome back to On the market. Let’s jump right into how job growth can help identify booming real estate markets. When you look at this Austin, are there certain types of jobs that are more important to home prices and to economic performance than others?

Austin:
Yes. White collar jobs are more important than
Blue collar jobs when it comes to home price appreciation. It’s not saying that blue collar jobs are unimportant, they’re very important, but just when we track correlation between these variables and price growth, white collar jobs sort of take the cake because they pay more and people have more money they can afford to pay more for the same house. That being said, as far as what is classified as white collar jobs, professional and business services, education and health services information, so software and tech, those are the kinds of jobs that maybe you want to be looking at to see if those are growing in a particular market.

Dave:
I would imagine that it will depend on market to market. Like if you were looking at a city like Los Angeles that has just an enormously diversified economy, white collar is going to be more important, but I would imagine that if you’re in a city that’s relatively blue collar, the proportions are less tech focused, business focused, finance focused, that the importance of blue collar jobs will increase proportionately based on what the economy is built around.

Austin:
Yes. So two examples that immediately come to mind are Indianapolis and Chattanooga, Tennessee
Logistics is the number one industry for both of these markets, and logistics is historically a blue collar job. And what we found is at least with Indianapolis wages, there aren’t as high as surrounding Midwest markets. And interestingly enough, home prices there have not appreciated as much as surrounding markets. You could also attribute that to how easy it is to build there. It is flat as the eye can see, but that being said, you look at Chattanooga as well. There’s slightly more geographical constraints on where you can build, but it is a logistics heavy industry there and wages haven’t risen as fast as maybe its neighbor Nashville, but the amount of jobs in those industries are increasing for both of those places. So they’re still growing, they’re still bringing in people, thus bringing in demand, thus potentially bringing up home prices as well.

Dave:
Within a city, how much does it matter? Because you talk about a city like Indianapolis, pretty big city. Does it matter where the jobs are located within the city or just that they exist in the city?

Austin:
I think at that point we start to dive into which neighborhoods might be the best places to invest because commute time matters. Some people don’t want to drive an hour to their jobs, and so these areas that are sort of closer to these employment hubs might see more appreciation. The further out you get from the, I guess the city’s core economic center, the less the homes might appreciate over time. Again, there are plenty of exceptions, but typically you will want a neighborhood closer to the jobs than not.

Dave:
Let’s shift gears. I want to talk about how people can do this research for themselves because presented what I think is a compelling case, and you’ve done the math, you’ve done the research to show that on a metro level, white collar jobs, household income, super important. How do people take the research that you’ve done and apply it to their own portfolio?

Austin:
Okay, so I’m going to answer this question in two sections. The first is we’re going to look at MSA level data, how you can compare different markets together, and that might be important for the investor that is looking to invest out of state. Now, if you’re an investor looking to continue investing in your own backyard, the second answer to this question is where you might be able to find this data at the neighborhood level, and I’ll get to that.

Dave:
Okay.

Austin:
But first, if you’re an out-of-state investor and you have a few different markets in mind that you want to compare, and this is something that everyone can do, all I do is look up, let’s say I’m interested in Columbus, Ohio, Columbus, Ohio economy, and then the letters BLS type that into Google. BLS is the Bureau of Labor Statistics, and they publish updated employment numbers every single month. And so if you were to look up Columbus, Ohio jobs and then the letters BLS, it’ll take you to a page where it’ll break down all the different types of jobs and have them been growing. And the one section I like to look at the most is the section under total non-farm. It’s the total amount of employment that are not farmers, and they have a little graph icon. You click on that and you can see the graph of jobs either rising or not rising over time, and that can just give you a very broad sense of if this market is growing or not.

Dave:
Okay, great. Yeah, I just did this as you were describing that I did Indianapolis, which we’ve been talking about BLS, and I’m looking at it, and so I’m seeing a bunch of different stuff here that I think people would find useful. One is just the size of the total employment, total non-farm employment as well. And so for example, I can see pretty clearly here that non-farm payrolls in Indianapolis are going up. That’s great. I could see it’s growing about 2.6% year over year. What are you looking for on this sheet of numbers here? What should one or two things that our audience should be paying attention to?

Austin:
This is going to sound dumb, but if all my years analyzing markets, as long as the graph is going up and to the right, that is arguably the most important thing that we want to look at. The thing is you don’t need calculus,
You just need to know that it’s growing. So as long as that jobs growth graph is going up and into the right, to me, that’s the most important thing. And then of course, if you’re comparing markets and you want to get really nerdy like I do, you can compare these growth metrics. Like you just said, maybe this market is growing at 2.6% year over year, and then there’s another market that’s growing at 3.3% year over year. You can get into the weeds as much as you want, but honestly, if you’re just comparing markets on a broad level, you just want to know if the economy is growing or not. And do you

Dave:
Stop there? I mean, I know you probably don’t, but should an average investor stop there or is there more research into the job market they should be doing?

Austin:
You might want to look at household income,
And so one thing you can do is, again, on Google, you can type in and say for example, Indianapolis, Indiana, median income, Google’s gotten pretty good at just displaying the graphs immediately, and hopefully they do for you in your particular city. They don’t do it for all cities, but as long as that income is growing, that’s what you want to see. You don’t want to see flat income. There are a lot of affordable cities that have household meaning income lower than the national median, and in my opinion, that’s okay. That’s why these places are affordable. They pay less than wages maybe because of they’re already affordable. So it’s not this spiral of housing prices are getting out of control, so we have to continually increase wages like San Diego and Los Angeles and San Jose. So that’s what I care about the most. Are wages also increasing if they’re not increasing? I think that’s a bad sign

Dave:
For sure. Yeah, I think especially in today’s day and age, because inflation’s a bit higher than anyone wants it to be. If wages aren’t going up, that means that people spending power is declining. That’s not going to be a good situation for your tenants, for home price, values for the economy, for society in general. So that one would worry me. Luckily, I think most places in the US are seeing wage growth right now, so that’s pretty good. Stick around. After this break, we’ll talk more about how you can apply Austin’s research to your own investing. Stay with us.
We’re back with Austin Wolf discussing all the ways job growth can help predict housing market trends and how you can take this research that Austin’s done and apply it to your own portfolio. Austin, before we let you get out of here, I’m going to ask you to predict the future. Again, a lot of the stuff data is inherently backward looking. Are there ways where you can sort of forecast or get a sense of how job growth or wage growth may change in the future? And of course, you can look at previous trends, but you hear about companies moving. Do you hear about new data centers opening? Do you track that kind of stuff to try and get a sense of what might be coming down the road?

Austin:
Yeah, that’s a great question. I would put that into the category of trying to predict the market, which no one has been able to do effectively, but there are certain trends that you might want to look out for. One example is I’ve talked about on the show before North Carolina, they’re updating their tax code to reduce the corporate income tax that corporations pay there. That is likely to attract more companies to the area. So that’s a piece of data that you might want to be on the lookout for. Is this state becoming more or less business friendly? California’s
Historically been not so business friendly over the past few decades and after starting my own LLC here in LA, it’s, I don’t like it here as far as business is concerned. And you can see that even film productions here have been moving outside of la. So that would be I guess, an opposite trend. Okay. This isn’t good for LA as far as jobs are concerned. I also like to look at colleges as well. That data point is a lot harder to get, but if you’re interested in a certain market, maybe look at the colleges there, see if the admissions are growing, maybe see if they’re just high rated colleges because colleges provide an educated workforce and companies want to hire educated workforces, so that might be attractive to businesses as well. I would say start there, if you’re thinking about trying to predict the future in terms of, okay, where is this market going to go? What are the taxes looking like? Is it good for companies? And then what are the colleges looking like? Is there an educated workforce there? I would start there.

Dave:
Got it. One thing I’ll add, I talk about this on the show a lot, but I really find a lot of value in reading local publications, whether it’s a newspaper or government press releases, white papers, that kind of stuff. They will tell you things like, we are offering taxes, incentives to data centers. Great. I want to know that. Can I forecast the number of jobs that’s going to add? No, but it tells you the type of business climate or business environment that the local government is trying to curate. The other thing is sometimes I subscribe to local business journals in the markets I invest in, and I just informally just track are there more announcements of places opening and hiring or places laying off and firing? Because they’ll report both. And you kind of get your own sense of which way employment trends are going and which industries are doing well.
And as Austin said, I’m not really worried about restaurants going out of business. It’s very risky, volatile business, but if you start to see, hey, this major employer is upgrading its facilities, they just bought a new parcel of land. They are partnering with the state on something big. Those are the kinds of things that are going to matter. Whereas if you see, hey, this company’s moving outside of LA or outside of your market to a different place because that’s a more attractive, those are the type of trends that might continue for the foreseeable future and something you probably want to get ahead of. That’s my insight here, but Austin, thank you so much for doing this research. Is there anything else you think the audience should know before we get out of here?

Austin:
I do want to just briefly touch on if you’re investing in your own backyard or if you’re going into a different market altogether and you’re trying to figure out, okay, well, which neighborhoods might have the highest household income? That data point is out there, it’s available at the census, it’s free, but it’s not necessarily easy to use. And there are certain websites out there that have created different zip code maps based on certain cities that you might be interested in. But that’s one thing to keep in mind. You might have to go digging for that data. And for those maps, there’s no easy one universal map that comes to mind just because of how hard it is to aggregate and clean that data. I’ve done it before and it’s a challenge. So try to do your best to find those maps. They’re out there for your specific city on which places have income growth, which places have a lot of jobs around them, you’ll have to go digging, but put in the work. That’s how you get to know these markets.

Dave:
Totally.

Austin:
And if you live there, drive around. I mean, you probably already know which places are great to invest in if you live there, but that’s all.

Dave:
Yeah, that’s exactly right. And it really just is your job as the investor to go out and look for this kind of data. And it’s amazing to me. People ask me all the time, they’re like, how do I find data about the median home price in Charlotte? I’m like, just Google it. Just Google it. It’s the same thing. You find any other information and yeah, as Austin pointed out, you should dig a little deeper. You should look for investor specific metrics. You should look for business specific metrics, but it is absolutely out there. Unless if in a small town it might not, but if you live anywhere near a major city, you are going to be able to find this information and you really should spend, it’s not even that much time. Spend an hour or two hours looking for this data. You’re going to learn so much about your market that you wouldn’t have known previously. Well, Austin, thanks again for doing all this work and for coming on the show and sharing it with us. I’m always happy to talk about it. Great, and thank you all so much for listening to this episode of On The Market. I’m Dave Meyer and I’ll see you again soon.