How Home Values Compare in Red vs. Blue States

IRVINE, CA—Political and geographic constraints tend to limit home supply in many areas in blue states, whereas major metro areas in red states do not have these supply constraints, ATTOM Data's SVP Daren Blomquist tells GlobeSt.com. According to a recent analysis from the firm, 3.4 million single-family investment homes (non-owner occupied)—that's 16% of all single-family investment homes nationwide—are owned by an out-of-state investor. In many cases those lower-priced markets are in politically red states with the out-of-state investors often hailing from politically blue states. We spoke with Blomquist about how home values compare in red versus blue states, the factors that cause valuation disparities and how these factors create buy-to-occupy versus buy-to-rent trends.

GlobeSt.com: How do home values typically compare in red vs. blue states?

Blomquist: Home values tend to be much lower in red states compared to blue states, although there are a few exceptions. Although there may be some political reasons that single-family rental investors are drawn to red states (less rent control, less slow-growth regulation), the primary reason is the lower home values allow them to generate better yields in those states.

GlobeSt.com: What factors cause these valuation disparities?

Blomquist: Political and geographic constraints tend to limit supply of homes in many of the major metropolitan areas in blue states. Political constraints include slow-growth policies (i.e., Portland's urban-growth boundary). Geographic constraints include mountains and water (think San Francisco or New York). Many major metro areas in red states do not have these supply constraints. On the other hand, population growth has been declining in some of the red states, primarily the Rust Belt and Midwest, causing less upward pressure from the demand side on prices. This is not true for all red states, particularly Texas, Florida and other parts of the Southeast, but those states still have the advantage of fewer constraints on supply.

GlobeSt.com: How do these factors create buy-to-occupy versus buy-to-rent trends?

Blomquist: In many of the red state markets with relatively low prices but not as rapid home-price appreciation, a buy-to-rent strategy is more appealing than a buy-to-occupy strategy since it generates strong cap rates of 6% or higher, whereas buying to occupy does not generate a strong return on home-price appreciation. There are some red-state markets that have the best of both worlds with strong price appreciation along with relatively low prices, but many of those markets were picked-over early on by the large institutional investors and are not as appealing in terms of monthly cash flow. On the other hand, in many blue states, buying to occupy or home flipping is a more appealing strategy because of the rapid home-price appreciation that generates solid returns on home value for the owner occupant or the flipper. Buying to rent in these high-priced blue-state markets is less appealing because it's hard to buy at a low enough price to generate strong cap rates.

GlobeSt.com: What else should our readers know about red state vs. blue state home values?

Blomquist: Opportunity for real estate investing should only increase in red states over the next four years given President-Elect Trump's plan to invest in fixing infrastructure in the nation's aging cities. Many of those aging cities with failing infrastructure are in states that are red or went red in the 2016 election (think Flint with its water crisis). Investment in infrastructure in those cities should help to raise both rents and home values in those cities.

IRVINE, CA—Political and geographic constraints tend to limit home supply in many areas in blue states, whereas major metro areas in red states do not have these supply constraints, ATTOM Data's SVP Daren Blomquist tells GlobeSt.com. According to a recent analysis from the firm, 3.4 million single-family investment homes (non-owner occupied)—that's 16% of all single-family investment homes nationwide—are owned by an out-of-state investor. In many cases those lower-priced markets are in politically red states with the out-of-state investors often hailing from politically blue states. We spoke with Blomquist about how home values compare in red versus blue states, the factors that cause valuation disparities and how these factors create buy-to-occupy versus buy-to-rent trends.

GlobeSt.com: How do home values typically compare in red vs. blue states?

Blomquist: Home values tend to be much lower in red states compared to blue states, although there are a few exceptions. Although there may be some political reasons that single-family rental investors are drawn to red states (less rent control, less slow-growth regulation), the primary reason is the lower home values allow them to generate better yields in those states.

GlobeSt.com: What factors cause these valuation disparities?

Blomquist: Political and geographic constraints tend to limit supply of homes in many of the major metropolitan areas in blue states. Political constraints include slow-growth policies (i.e., Portland's urban-growth boundary). Geographic constraints include mountains and water (think San Francisco or New York). Many major metro areas in red states do not have these supply constraints. On the other hand, population growth has been declining in some of the red states, primarily the Rust Belt and Midwest, causing less upward pressure from the demand side on prices. This is not true for all red states, particularly Texas, Florida and other parts of the Southeast, but those states still have the advantage of fewer constraints on supply.

GlobeSt.com: How do these factors create buy-to-occupy versus buy-to-rent trends?

Blomquist: In many of the red state markets with relatively low prices but not as rapid home-price appreciation, a buy-to-rent strategy is more appealing than a buy-to-occupy strategy since it generates strong cap rates of 6% or higher, whereas buying to occupy does not generate a strong return on home-price appreciation. There are some red-state markets that have the best of both worlds with strong price appreciation along with relatively low prices, but many of those markets were picked-over early on by the large institutional investors and are not as appealing in terms of monthly cash flow. On the other hand, in many blue states, buying to occupy or home flipping is a more appealing strategy because of the rapid home-price appreciation that generates solid returns on home value for the owner occupant or the flipper. Buying to rent in these high-priced blue-state markets is less appealing because it's hard to buy at a low enough price to generate strong cap rates.

GlobeSt.com: What else should our readers know about red state vs. blue state home values?

Blomquist: Opportunity for real estate investing should only increase in red states over the next four years given President-Elect Trump's plan to invest in fixing infrastructure in the nation's aging cities. Many of those aging cities with failing infrastructure are in states that are red or went red in the 2016 election (think Flint with its water crisis). Investment in infrastructure in those cities should help to raise both rents and home values in those cities.