The U.S. housing market is facing an affordability crisis. The combination of high home prices, rising mortgage rates, and decreased spending power has driven housing affordability to its lowest level in decades. As such, it is difficult for investors and homebuyers alike to identify cities where they can afford to buy property.
But, there are still great opportunities to buy real estate, even on a budget. I’ve done the research and have identified the eight most affordable markets for real estate investors. Below, I’ll explain how we arrived at the current situation, my criteria for selecting these markets, and then give you some data about the cities. Check out the list below and determine if any of these cities fit your investing goals.
How We Got Here
At this point, everyone knows what’s happened to the housing market since the beginning of 2020: it went up a lot. Driven by strong demographic demand, remote work, ultra low interest rates, and several other factors, the housing market went on an incredible run of appreciation from the beginning of 2020 to the middle of 2022.
Since the summer of 2022, prices have started to come down as mortgage rates have risen, but the appreciation we’ve seen is still staggering. From December 2019 to December 2022, prices grew 31% on a national level. In certain markets, prices have gone up even further. Austin, Texas, for example, has gone up 43% in that timeframe, despite seeing price drops over the second half of 2022.
The reason prices started to drop in the middle of 2022 is because affordability eroded. Despite rapidly rising prices, affordability in the housing market was still strong for years due to low mortgage rates. But of course, when rates started to rise, reality started to set in. The combination of high rates and super-high home prices eroded affordability to the lowest point in decades. Below you can see how dramatically the U.S. Fixed Housing Affordability Index declined.
Of course, the story of how we got here and the data I’ve shown is on a national level. In reality, the housing market is very regional, and there are still relatively affordable places to buy real estate in 2023.
Methodology
I selected four criteria to help investors understand where they can make affordable investments with good long-term return potential. The city had to meet my definition of affordable and pass some basic test of “investability.”
- The city has to have a median home price lower than the median home price for the U.S. as a whole (which is around $400,000 as of this writing).
- The city had to be large enough to have good economic prospects and reliable data. I drew from a pool of the 100 largest metros in the U.S.
- The city has to have grown in population from 2021 to 2022, according to the U.S. Census. While there are many macroeconomic variables you want to look at when selecting a market, population growth is perhaps the most important. Hint: a lot of them are in Florida.
- The city has to have a rent-to-price ratio (RTP) above .6%. RTP is a good proxy for cash flow, and although you’ll likely want to find a deal with an RTP of .75% or higher, if a city averages .6%, it usually means you can find solidly cash flowing deals. When I was doing this analysis, I found that all of the cities with higher RTPs than those on my list had declining populations.
Together, this is a list of major metro areas that have home prices below the national average, are growing in population, and have a good opportunity for cash flow. Of course, I could consider many other criteria to select these markets, but this list is simple, easy to understand, and provides good direction. If you are seriously considering investing in any of these markets, you should do far more due diligence and understand the market much deeper than this analysis allows.
The Markets
Below you’ll find a list of the eight most affordable markets for real estate investors for 2023. Notice that while all of these markets have median home prices at least 15% below the national average, there is a big difference in price point even on this list. For example, the cheapest market, Oklahoma City, has a median home price of about $165,000, which is almost exactly half the price point of Tampa, the most expensive market on this list.
I’ve provided some additional data here for you to review: year-over-year sales price, median rent, and rent growth, as well as population growth.
Final Thoughts
Again, if you’re considering investing in any of these markets, you need to do a lot more due diligence. You should learn more about the economic situation, regulatory climate, and demographics of the area, just to name a few key topics. You also need to find a good deal! Within each of these cities, there will be deals with great returns and deals with bad returns. It’s your job to find the good ones.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
