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Attorney Matthew Driggs grew up in southern California, but when he and his wife were considering where to settle and purchase a home, California wasn’t even a consideration. “Everything in California is more expensive — gas, sales tax, income tax, housing/rent, food, auto insurance,” Driggs said. They knew the stress of having a giant mortgage would decrease their quality of life living in a state with some of the highest housing prices in the country.

The couple considered Dallas, Texas, as well as Raleigh, North Carolina, both with burgeoning job markets and significantly more affordable housing prices. But they ultimately settled on Salt Lake City, Utah. “Housing was definitely the biggest factor,” Driggs explained. “We want to have children one day, and we are fiscally responsible. A mortgage worth half a million or more dollars is a scary, dangerous proposition we wanted to avoid.”

BURGEONING MARKETS IN SECOND-TIER CITIES

Salt Lake City is one of the fastest growing medium-sized cities in the United States right now. An increasing number of professionals are eschewing expensive housing markets like those in traditionally hot job spots like Silicon Valley and New York City in favor of smaller cities with more affordable housing options that still have big-city amenities.

“We live in downtown Salt Lake,” Driggs said, “so we get a small city vibe but can easily drive for 20 minutes and be in nature.” He added that his standard of living is also significantly higher than if he had stayed in California. “Our mortgage in our Salt Lake City suburb is equal to what a 20% down payment would have been for a modest home in a non-violent California city.”

Danielle Hale, managing director of housing research for the National Association of Realtors, says many medium-sized cities like Salt Lake are also investing in infrastructure and lifestyle, “building more vibrant downtowns and local amenities similar to what you have in big cities.” Combine that with more affordable housing and strong job markets, and it’s no surprise second-tier cities in many parts of the country are seeing population and housing value growth.

According to recent data from NAR, the median sales price for existing single-family homes in Salt Lake City in the first quarter of 2017 was $284,000, an almost 10% increase in price from the same quarter a year ago. Even with quickly expanding home values, Salt Lake City offers substantially more for the money when compared to Los Angeles, where the median sales price for existing single-family homes is nearly $486,000. In San Francisco, the median price in the first quarter of the year was $815,000, and, interestingly enough, both California cities are seeing only half the price growth of Utah’s capital.

Brandon Boudreau, COO of Detroit-based Metro-West Appraisal, which serves 80 metro markets across the country, says that while markets like New York and San Francisco are still seeing price growth, “they’re becoming increasingly unaffordable.”

However, there’s more to it than that. Affordability issues may be the buzz concern of the hour in housing in many major metro areas, but the issues with why an increasing number of homeowners and would-be homeowners are eschewing big cities in favor of smaller markets are far more complex.

Robert W. Gilmer, director at the University of Houston’s Institute for Regional Forecasting, C.T. Bauer College of Business, said, “there are many problems on the supply side, some specific to the times, others self-inflicted by localities.”

He pointed out that following the recent financial crisis, it became increasingly hard for land developers to obtain financing, particularly since smaller banks were unable to meet the capital requirements instituted under the Dodd-Frank Act for making large development loans. Even though credit has eased in the last few years, there is still a supply shortage in many cities.

The supply issue, Gilmer said, is exacerbated further when there’s no available land. “Coastal city geography hurts,” he explained. “Others have strict zoning or green space laws, NIMBY attitudes, and other requirements that limit the supply of land and make it very expensive to develop lots.”

He added, “The price of lots is the big difference in cost between cities, much more than the price of home construction.”

Meanwhile, the construction industry has been suffering from increasing shortages in its labor force. “Mexican migration is slowing and has been for some time,” Gilmer said. “Forget Donald Trump. Population growth in Mexico has slowed to levels that barely cover reproducing current population levels for many years.” That means the country’s demographic pressure has lessened, reducing the need for citizens to migrate for employment. 

Native-born Americans, however, aren’t picking up the labor slack. “[They] don’t want to work construction,” Gilmer said. “[It’s] hard, manual, unreliable work in all kinds of weather.” While he acknowledges that construction workers receive good compensation, fewer young people aspire to a career in it.

At the end of the day, Gilmer said, many large metro areas have suffered a triple whammy when it comes to housing: “Too few resources available for home construction — capital, land, labor are all in short supply.”

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WHERE MID-SIZED MARKETS ARE HOTTEST

Boudreau points to Texas as the consistent boom state, where markets like Austin and Plano (just north of Dallas) represent “shining examples of affordability and growth.” According to NAR, Austin saw a 6.2% increase in home values year-over-year in the first quarter of 2017, while the Dallas metro area has experienced more than twice that at 12.6%.

Despite the oil bust, Dallas continues to thrive, as do other Lone Star cities like Austin and San Antonio. Why? “The Texas growth formula still works, pulling migrants from California and other more expensive states,” Gilmer said. With fewer regulations, a business-friendly climate, low taxes, and lower housing costs, Texas metro areas continue to draw workers and homebuyers.

Boudreau says the No. 1 reason mid-sized cities are growing, very quickly in some places, is because of affordability. But that affordability also has to come with a solid job market. As an example, he points to Miami — the only top 50 MLS market with a stable supply of housing. “That’s because Miami doesn’t have the job market,” he explained. “Now Orlando has the jobs, and there’s affordability there, too, so it’s growing.”

Likewise, there is a lot of affordability in the Midwest, Boudreau pointed out, “but if the job demand isn’t there, you’re not going to see the growth.”

Plano, on the other hand, has seen a lot of job growth in automotive and manufacturing. “Texas has a favorable business climate,” Boudreau explained, “so a lot of corporations are moving there. While housing starts have dipped nationally, they haven’t in Plano — it’s getting that echo boom from Dallas.”

Hale said that while Millennials may have initially flocked to large cities like San Francisco because of hot job markets, as they age, “they are looking for places to start families and settle down.” With secondary markets like Austin and Denver gaining an increasing number of high tech companies, they look attractive to young professionals who want more bang for their buck when they purchase a home.

This isn’t to say bigger markets aren’t busy. “We’re still up to our ears in transactions in L.A., San Francisco, and New York,” Boudreau pointed out. But the same is true of a lot of second-tier markets like Albuquerque, Austin, El Paso, Salt Lake City, and Grand Rapids, Michigan, too.

Hale added Denver, Raleigh, and Charlotte, North Carolina, to that list. In Charlotte, prices were up 13.4% in the first quarter of 2017 compared to a year earlier.  “The growth rate in prices is a pretty good indication of what’s happening at the local level,” she said. “If a lot of people are coming in, that tends to push prices up.”

Like Salt Lake, where the Driggs decided to settle, these cities all have great natural settings with proximity to outdoor recreation, something Hale also sees as a growth driver. “A home is a long-term purchase,” she said, pointing out that markets with jobs attract people but stability and amenities play a role, too.

While foreign investment has played a role in growth in many top-tier markets in the U.S., from Miami and New York City to Detroit and L.A., Boudreau says he doesn’t feel foreign buyers have really penetrated secondary markets. “House flipping has been at an all-time high since the housing crisis,” he said, “but that’s domestic investment.”

WILL THE GROWTH PERSIST?

Whether or not medium-sized cities will continue to grow into the coming years remains to be seen. Boudreau said the pace of growth will likely have a lot to do with it. He said when cities grow too quickly, the infrastructure and job market will eventually struggle to stay apace…which can lead to a housing crash. He believes Portland, Oregon, represents an unstable market right now because population and housing price growth has been so drastic: “I think it’s unsustainable.”

“Cities with more steady growth supported by corporations will see growth continue,” he added. He expects Salt Lake City to continue to grow because it’s been doing so steadily.

Hale is less optimistic. “If there was another downturn, these cities would be affected,” she said. “The trends driving young people to these places are that they’re moving into that age range where they want to have a family.”

That means factors like housing affordability, lifestyle and reduced traffic all play a role in where to settle.

Hale thinks whether or not this current trend of growth in secondary markets will continue not only has to do with whether or not job growth is stable but also with the local building environment. “In Silicon Valley, you have natural barriers that prevent a lot of new construction,” she explained. “If local regulations make it difficult for builders to build, then there’s a limit to growth.” Thus far, she hasn’t observed anything like that in medium-sized metro markets.

GIlmer said he doesn’t think the growth in second-tier markets is ultimately about their size. He points to how prices in Houston went through the roof with the fracking boom earlier in the decade, but now supply has finally caught up with demand, and that supply is geared toward moderate-income earners, not oil executives. 

The real question, Gilmer said, for determining which cities will continue to experience growth in population and housing is “who can deliver reasonably priced lots over a period of years?” Given that development takes time, cities need a steady supply of lots and healthy housing starts.

Places like Boston, San Jose, and L.A. can’t deliver on that front because they have such restrictive development laws, “they will never catch up.”

According to a 2015 report from California’s Legislative Analyst’s Office entitled “California’s High Housing Costs: Causes and Consequences,” high housing costs in coastal cities have not only required families to live farther away from where they work (and hence endure commute times 10% longer on average than the rest of the country), but they have also driven up housing costs farther inland. The result is the Golden State has become “a less attractive place to call home, making it more difficult for companies to hire and retain qualified employees, likely preventing the state’s economy from reaching its full potential.”

And while a strong job market and affordability are good drivers of population and housing growth, they’re not the only ones. “In the warmer climate states, the aging population is moving there, too,” Boudreau said. “We’ve got a good economy. It’s not a great economy, but things are pretty good for the first time in awhile.”

As for the Driggs, they’ve put down long-term roots in Salt Lake City. “Our lower cost of living here allows us to save money toward retirement, pay off our mortgage ahead of schedule, and potentially have one stay-at-home parent when we have children,” Driggs said. He noted that a one-income household in Utah is possible for an above-average income earner. “In California, you need to be rich to raise a family on a single income.”