CW 1127: 2019 Investment Outlook, Gentrification, Opportunity Zone Hype, NeighborhoodScout by Andrew Schiller

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Welcome to episode number 1127. 1127. This is your host, Jason Hartman. And today we are going to go back into neighborhood research as we talk to my friend Andrew Schiller from Neighborhood Scout. Kind of take a deeper look at different neighborhoods. He's a returning guest, been on the show before. So we will take another dive into that topic today anyway as it is an absolutely gorgeous day here on the Treasure coast of Florida. It is beautiful, just beautiful. Once again I am reminded that that is why this is such a tourist attraction place for people from around the world. They love to come here and check it out. So I hope you are enjoying your weekend. This will be of course broadcast on Monday and how do you like that five day schedule we're on? Are you keeping up with five days a week of episodes? I hope you are. A lot of you requested it. So here we are and soon maybe we'll even go to seven days a week. Seven days a week. Can you imagine that? O okay. We have got a fantastic event coming up for Meet the Masters, we'll make some formal speaker announcements with more details about them. But of course, we have George Gilder, we have Tom Wheelwright, we got a couple other speakers we're working on. But we are going to leave a little more time in the schedule for our own content because after the last Meet the Masters, which was a three day event, this one is a two day event like a normal one where we had so many speakers. Some of you said, you know, I wish I heard more from Jason and Jason's team. So we're going to do that for you this time and make sure it has a very nice balance. Ticket prices will have another price bump here in the relatively near future. So go ahead and get your tickets@jasonhartman.com masters. But maybe more important than ticket prices are the room block prices. We've got a fantastic discounted room block, a beautiful property in Newport Beach, California, where we will be hosting the event. So do not not miss our discounted room block. And we put a countdown timer on the website, Jason hartman.com masters showing you the next ticket price increase. The early bird gets the worm, right. And also discount room block expiration date. And that is from the hotel, not from us. So there we go. Okay. A lot of stuff going on the news. We're going to get to talk to you about that stuff this week. But without further ado, let's get to Andrew and talk about market research, neighborhood research, demographics, all of these important factors as we dive in today. So here we go.

It's my pleasure to welcome a returning guest back to the show. And that is Andrew Schiller, founder and CEO of Neighborhood Scout, a fantastic tool for for real estate market research. Andrew, how are you today?

Very well, Jason.

Well, good. Welcome back. So you are out with a New Year Investor Forecast report. Tell us a little bit about what you found and what the crystal ball says.

Oh, absolutely. Well, you know, about two years ago we came out with a report that said that the Front Range area in the Denver Boulder region was likely to see a downturn in the future. And the Denver Post carried that article. And the report at the Denver Post got a lot of heat from the local real estate folks that that wasn't going to ever happen. It was too hot and it would never come back to earth.

You know, Andrew, that's what people always think. You know, everybody's a genius in a bull market and they think it's going to last forever. And it never does.

Imagine that.

But about a year and a half after our Report came out. Lo and behold, National Mortgage News came out with a headline that says a chill is taking hold of the Denver real estate market. So we were very prescient in understanding that this was going to happen and we did a year and a half in advance. Even during the market was going great, we knew that it was going to turn and we knew about when. Also in the second quarter of 2017, we forecast that the Las Vegas, Henderson, Paradise, Nevada metro area would rise to become the number one highest appreciating metro area in a America.

And it did. I remember that.

And it did. The Case Shiller Home Price Index data from August or September of 2018 more than a year later said that it did do that. So we are now showing what we think is likely to happen in 2019. 2018 had a national change of about 7.6% increase in overall real estate values. We expect in 2019 is going to have a significant deceleration in home price appreciation. Appreciation down to about 4.5%.

Yep, that sounds about right to me. So you had, you said 7.6% last year and things are slowing down and now your 4.5% is your forecast, right?

That's exactly right.

Okay. Now the problem is, as you know better than anybody, all real estate is local. And we've got to divide that up into at least three types of markets. And that's what I'll say, linear, cyclical and hybrid. And the problem is these aren't weighted the same when you look at those national numbers. And that's why your tool is a very handy resource because do the national numbers even matter?

I mean, they're good conversation pieces, but that's about it, right?

That is so true. They are good sound bites. But the broad national picture hides a far more dynamic story of the real estate markets where fortunes are to be made and lost. And while macro economy economists, just like you said, Jason, tend to describe general conditions for the nation's real estate market, we have a team of PhD geographers and we study each metro area, zip code and neighborhood in America to understand the local real estate market. So let me tell you a little bit about what we found for metro areas.

All real estate is local. Okay, go.

Yes, absolutely. So what we found is that the top performing metro areas as we see them coming up in 2019 home price appreciation forecast.

Right. Now this is, we gotta understand though, this is an appreciation forecast. It is not a rental income forecast and it does not take into account current rent to value ratios. So it doesn't mean everybody should run out and invest in these markets, necessarily, because there's more to it than just appreciation.

Absolutely. This is one measure, one thing to look at, but it is not necessarily what your cash flow income would be from buying a rental property in those places.

Okay, now that we know that and we have that disclaimer out of the way and everyone has calmed down a little bit, let's go into it.

Great. So the top 10 are, number one, the Mount Vernon Anacortes, Washington metro area with a forecast HPA, even though the national is about 4.5%. This one for 2019 is 10.7%.

And HPA is home price Appreciation. That's the forecast. It's speculative, obviously, because you could be wrong. But you think that'll go at about 10%. That's fantastic. Wow.

And there's two in Florida that we think are going to be very close to that amount. The Hermosa Springs, Florida area at about 10.1% and the Ocala, Florida area at about 10%.

Wow. Ocala at 10%. And what was the other one before Ocala, Hermosa Springs. Okay. Okay. What else you got? Let's go down the list a little bit.

The Las Vegas area at 9.5%. The Madera, California area at 9.4. The St. George, Utah area at 9%. The Fayetteville Springdale Rogers, Arkansas metro at 8.5. The Lafayette, West Lafayette, Indiana area at 8.4. The Raleigh, North Carolina area at 8.4. And rounding out the top 10, Greensboro High Point, North Carolina at 8.8.

Yeah, that's good. And we've done a lot of business in a lot of those markets, so that's fantastic. And many of them have decent cash flow, so it's not like you would be taking a huge risk, risking the speculative gamble on appreciation while sacrificing cash flow. So not bad at all. Now, do you look at, and I believe you just added a feature where you look at income, right? You look at the rental income. Right.

On neighborhoodscout.com you can look at any neighborhood or even micro neighborhood in the US and get a gross rental yield that's average, not specifically for the rooftop or that property, but what the rental values are in that micro neighborhood or neighborhood versus the cost of purchasing one of those similarly bedroomed properties.

Right. Okay. So essentially a rent to value ratio, right?

Yes.

Okay. And why don't you go ahead and define if you would neighborhoods and micro neighborhoods and any other types of divisions that you or, you know, other demographers use to slice the pie Up.

Sure. Well, of course there's the whole country and then there are states and counties and cities and metro areas. But when we think about neighborhoods, we tend to apply the kind of the official designation of a neighborhood developed by the federal government, which is consistent in the way it's defined and delineated across the country. And that's a census tract. There's about, oh, I would say under 40,000, 35,000 zip codes in America, but there's about 73,000 census tracts in America and they're so they're much more fine grained than your typical zip code.

Okay, so they're about half a zip code. Would that be a census tract?

Yeah, but what's interesting is that in urban and suburban areas, there often as many more census tracts than a zip code. There can be as many as 4, 5, 6, 7, 8. We've even seen a few with close to 15 unique census tracts that break up a single zip code.

And how do they decide what a census tract is? I mean, you know, it almost makes me think, Andrew, that it's like the way they do voter districts with the gerrymandering that the Democrats and Republicans are always arguing about. You know, because that also matters. I mean, do the census tracts change much over time or do they pretty much stay consistent?

You know, they revisit them. The Census Bureau defines these in conjunction with local authorities throughout the country. So they're always meant to have, essentially the local authorities are tasked with trying to identify areas that are relatively homogenous internally with regards to the housing stock, lifestyle and living conditions, but that are different from areas around them so that they can be defined and they have visible demarcations, whether it be a river or a mountain or railroad tracks or highways or something that can be used or streets to break the boundaries. They tend to want to have them have about 1600 households in an individual census tract. They tend to be around 4,000 persons. But there's a great variation amongst that. A great, as we would say, statisticians, standard deviation. Some may only have a few hundred people and some may have over 10,000, but the average is about 4000 people.

And about 1600 households units, in other words. Right.

And what we call a micro neighborhood is a subdivision of the census tract and those are called block groups. Now from fewer than 40,000 zip codes in the U.S. a census tract is about 73,000. But block groups, or we call micro neighborhoods about 218,000. So this is a really small area.

Oh yeah, it's a really micro group. Okay. Good to know. That's very interesting. So a micro neighborhood is about generally maybe 1/2 or 1/4 of a census tract.

That's right. Depending on the location, there can be as many as 9 micro neighborhoods within an individual census tract. And in some rare occasions there are no difference. They're one in the same.

Okay, now I gotta ask this question. Do other tools and surveys use the same type of divisions that you use with micro neighborhoods? They probably all count census tracts. But do they do the same micro neighborhooding or is that unique to you?

Well, you know, because there's micro neighborhoods or block groups that are also defined by local authorities and the federal government, they are in wide adopted use for all kinds of different types of analysis. However, we choose that unit of analysis to build special data to that you can't find in other places except on Neighborhood Scout. You get the kinds of things that you could get and standardize and look at across multiple platforms in some cases. Plus you get a very solid complement of additional information that you can only at that same spatial scale that you can only get on neighborhood scale.

Okay, great. Now I want to switch gears a little bit and I want to talk about neighborhood renaissance and the possibility of it, the gentrification trend that happens in some neighborhoods but doesn't happen in others. I bring this up because as we were talking about off air a little bit before, about this huge bunch of promotion around the opportunity zone tax deal, which frankly, unless I'm missing something, I don't think it's that good a tax deal, first of all. And I don't think it necessarily will lead to very good investments either. So, you know, one rule of investing I say is don't let the tail wag the dog, right? Don't invest just for a tax break. The investment itself needs to be sound and the tax break should be the icing on the cake. But I don't think you have either thing in most of these opportunity zones and you've got these promoters out there and just the name of it alone, the name that the government gave it, sounds like, hey, we better do this. It's an opportunity. The government says it's an opportunity zone. And I don't know, maybe I'm missing something and maybe I'll miss out, but I tend not to fall for, you know, the bright shiny objects I used to. But I. I'm older now and more conservative and you know, I don't do cryptocurrencies and.

I do miss out on a few things, but mostly I end up being right you know, you just gotta wait two years and. And Jason's always right again.

I guess a broken clock is right twice a day. So maybe, maybe I'm not so good at at this. But what makes a neighborhood come back and what neighborhoods are just destined to be blighted forever?

Well, that's a great question. So the question in some ways is what makes a location the right location? And we use nearly half a century of data in combination with machine learning and artificial intelligence and our PhD research team, we've uncovered some repeating patterns in which locations grow in value and which locations grow in rental prices. And those patterns change over time, shifting in context of the market and the hyperlocal conditions in and surrounding not only zip codes, but micro neighborhoods that can be is up to 10 times smaller than the typical zip code. But the right locations, the places that tend to rejuvenate most often combine a few different things like these that I'm about to mention from our analysis of half a century of data and hind casting number one biggest is outstanding access to a high number of high paying jobs, particularly within or at least jobs within 20 minutes travel time of that neighborhood. So if you have good access to jobs, that will really help keep maintain the value and bring the value up.

Okay, so that would describe the Oakland, California phenomenon.

That's right. Sometimes in combination with that are steep price advantages of that location over adjacent and surrounding neighborhoods. It's almost like real estate values and rental prices are like liquid on a landscape. They run from high elevation down to low and pop. We've found this to be the case over and over again.

But only you know, I made a name for that 15 years ago. I called it the water theory of real estate. Or if you know, water seeks its own level, right. If you spill a glass of water, it will go to the lowest level. And that's exactly what the money does. Right. And you know, we saw that with in the macro sense of California money leaving and going to Phoenix and Las Vegas. You know, we see it in much smaller neighborhoods as well on the micro level. So. Very true. Yeah, I agree.

That's amazing that you were figuring this out 15 years ago. That is exactly what our analysis shows. And that only really works if you have a neighborhood or an area in a metro region or region that has a growing economy and there's pressure on places around it that make it more expensive. So people are looking for an edge to find a place that's less expensive. And when they do that, they're willing to overlook some of the shortcomings of that location for the pricing advantage, and that drives the prices up. But where they look for that pricing advantage will be based on how many impediments there are in place or disadvantages to that location.

Right, okay. So they're willing to overlook little things like that Oakland is, or at least was, the highest price, highest murder rate city in the country.

That's actually not funny, but okay, that's right.

You know, but what happens is different. People are willing to overlook that first until it improves better, and then the next wave of people and the next wave of people. So depending on who you're trying to rent to, certain people will be more likely to overlook that. Maybe young single males than perhaps young families with little children.

But when in combination with good access to jobs, a steep pricing gradient advantage will draw in new investment, increased prices, growing regional economy, and in population pressure, which is demand often within a half a mile of the neighborhood itself. And low violent crime rates are very important, or even if they're very high violent crime rates, if you can see a trend to declining violent crime in the neighborhood, we find that property crime isn't much as much of an impediment to rental prices and real estate values as violent crime is. And so that's a much better integrative measure of a place that's on the rebound is if the violent crime rate is going down or projected to go down. And we on neighborhood scouts show both the violent crime rate and a five year trend and a five year projection for violent crime rate for any neighborhood you look at.

Okay. All right. Anything else?

Yes, Walkable access to passenger rail is very important. Increasing educational attainment of residents and location, improving schools that serve the neighborhood and hundreds of other variables that work to drive prices upwards in specific neighborhoods and specific zip codes.

Okay, so I know that it isn't your thing, but I just thought I'd throw out the question if it's answerable. Maybe yes, maybe not. But any thoughts on any of the opportunity zone properties? I mean, I have scoured that list and I gotta tell you, I'm not very impressed. And I don't know that I want to be putting money in those areas. There's certainly an exception everywhere and you can make money doing lots of things. But I'd love to compare that list to your criteria of what makes a neighborhood come back, because that's the best right on the opportunity zone investment is that it's going to come back and you're going to get tax free appreciation. That's the bet. But you've got to improve the property in order to qualify for that. So there's quite a few hurdles I think, you know, that these promoters aren't really making very clear. I don't think.

I think you're right, Jason. A couple of points on that subject is that if you find a place that lines up on those other criteria that I've mentioned just now, and it also is a place that is an Opportunity Zone, then you may be able to take advantage of the offering to choose between two places. One that's in the Opportunity Zone and has all these benefits or things going for it that are about to rejuvenate, and one that is not in the Opportunity Zone and still also has these benefits. So you can tip it from one to the other when you have two that have these. But I wouldn't use the Opportunity Zone tax benefit by itself in a vacuum without these other indicators in hopes that that's going to bring this up. The municipalities and local governments are attempting to use the Opportunity Zones to try to tip that scale for that liquid real estate value by saying, we're going to make this even a better deal for you in hopes to draw in that real estate investment. But it has to make sense on those other dimensions before you should choose.

Yeah. So I think the lesson here is don't let the tail wag the dog and be careful of the bright shiny object. That's a good lesson. Good thoughts there. Appreciate that. What else do you want people to know about picking areas, researching areas? You know, I mean, this is what you do every day, so you have just a wealth of knowledge. Andrew, anything you want to share with us? Maybe a question I didn't ask or a completely different area of the topic.

I often find that people base their decisions on stereotypes which are always backward looking, based on reputation. And you should really let the data set you free because it will reveal new opportunities that other people who you may be competing with for investing in property might not be looking for or not be looking at. And if you can find places that have by using the data that are otherwise undervalued because their reputation isn't good, but the data says that they are, you should really consider that strongly because you're going to get a good value and a great opportunity. One other thing that we noticed, well.

And we noticed that you're close to rail access here. It sounds like.

Yes, it's.

And I can hear the train.

And, and by the way, if you weren't listening listeners, you know, that was one of Andrew's criteria A few minutes ago. So.

You'Re so right. It is true. And right near this trade, one of the other things to think about is that when there's a lot of pressure from investors to buy things and invest, a lot of the opportunities are already gone. And sometimes even in a single metro area, it's hard to find those really good other opportunities. So it's almost like having the blueberry bushes being picked over already and still trying to find where is the next place that they're going to be. So one place to think about is those places that are likely to be going down in crime risk over the next 60 months, but otherwise have great gross rental yields, good opportunities and prices and other fundamentals in place. If you know that data, which you can get on Neighborhood Scout, you can then choose to invest in those places before your competition would and watch it rise up around you.

And how do you really know that? I, in asking that question, I almost think I know the answer. But you know, you talked about transportation, you talked about education. You know, when you say high paying jobs, I mean no investor listening is going to be interested in an area like Oakland because that's just extremely expensive. So high paying jobs are just a little higher in the blue collar scale. Maybe then you know, it's all relative. I guess that's my point.

That's right.

But how do you know the crime is going to be going down? I mean I know you can look at the neighborhood scout forecast and so forth, but how do you know, how do you make that projection? What are the any more, can you drill down and unpack any more of those elements?

Oh sure.

Of how you can make that forecast.

We've been studying crime trends at the neighborhood level, micro neighborhood level for almost 20 years. And then what we've done is we've seen what kinds of things are taking place in the demographics, the ages, the transients, the educational attainment, other types of educational attainment, other kinds of things about those neighborhoods over time, prices and what have you. And then we've looked at hind casting, that is we've regressed the data in reverse to see if we can predict from longer back in time into the future, but still back in time from now to see if we predicted correctly. And then we pull back the curtain and see if we've done it right. And we've been able to predict with upwards of 90% accuracy down to a sub zip code level how well the crime is going, how much crime is going to be in a location. So using that we've basically been able to do a five year forecast into the future based on crime risk. And we found that we're very likely to predict in a good scenario, most scenarios how much crime is likely to be there in the next five years compared to today, what's the trend from the past, what it is into the future. And those indicators can be very useful for people who are looking for the next opportunity when opportunities are slim.

Okay, good. Good to know. Let's wrap it up. Are you generally bullish or bearish on the real estate market? And I know that's a macro question, so it, it's not even a sensible one, but I'll just ask it.

I'm actually bullish on the real estate market. I think that while people are worried about recession and other things happening, we see the fundamentals are very solid in place, that the real estate market values are continue to grow and that the demand is very high and the supply is somewhat limited and there's a lot of people are interested in rentals, there's great economy and growing job opportunities. I'd say that 2019 is going to be a good year.

And there is. And you know what? I'll add one major thing to that. You covered everything. But you didn't mention that there's no ridiculous, silly, stupid financing like we had that caused the last Great Recession. So that makes for a much more sound future. I think that's very good too. Andrew, thanks again for joining us. The website is neighborhoodscout.com and you can also find a link to it@jason hartman.com Happy investing.

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