In the pandemic-driven housing boom that famously peaked around the spring of 2022, the Southern and Western inland markets stretching from North Carolina to Florida, Arizona, and Idaho were the superstars, posting the most sumptuous sudden gains in at least a half-century. But as the high-fliers deflated, it’s been the unglamorous, slow-but-steady stalwarts of the Midwest that have been notching the best record. And Ed Pinto, director of the American Enterprise Institute’s Housing Center, predicts that these plodders will probably persist as the nation’s best performing locales in 2024. “Believe it or not, cities like Cleveland, Columbus, and Pittsburgh have more going for them in the near future than a Las Vegas or Phoenix,” says Pinto. “That’s precisely because they’re still relatively affordable, while the price explosion in the Southern tier, at today’s surging interest rates, created a huge barrier for most potential buyers.”
Real estate in the Midwest is prospering while the Sunbelt fades
According to American Enterprise Institute (AEI) data, eight of the nine cities achieving the highest appreciation for the year ended Aug. 31 hail from the Midwest. Over that period, Kansas City garnered the nation’s best increase at +11.3%, followed by Grand Rapids (+9.3%), Columbus (+9.2%), Milwaukee (+8.5%), Cleveland (+7.7%), St. Louis (+7.7%), Cincinnati (+7.2%), and Louisville (+6.7%). (I’m including Louisville, though it’s considered a hybrid between the Midwest and South.) Pittsburgh, Chicago, Detroit, and Omaha also did well, all advancing between 5.2% and 6.2%. By contrast, the former champs across America’s Southern swath mostly range from flat to sharply down. Austin, Deltona, Fla., and Phoenix are off 5.5%, 3.2%, and 2.1% respectively, while Phoenix, Las Vegas, Boise, Colorado Springs, Raleigh, and Cape Coral, Fla., all showed smaller declines, meaning that they’ve also widely trailed a consumer price index that’s been running at about 3% since last August.
It’s revealing to examine where relative prices in the Midwest and Sunbelt stood over a decade ago, and the factors leading to the current, giant gap between the two regions. In January of 2012, where the AEI numbers begin, prices in the dozen Midwest metros cited above ranged from a low of $93,000 (Detroit) to a high of $157,000 (Chicago). Surprisingly, the figures in the subsequently raging Southern and Western metros, in many cases, were around the same or just modestly higher. At $122,000, Deltona was just about tied with Milwaukee, Boise, and Las Vegas at roughly $140,000; Phoenix and Cape Coral ranked on par with Omaha and St. Louis; and even relatively pricey Austin at $194,000 wasn’t leagues ahead of Kansas City ($154,000).
From 2012 to December of 2019, just prior to the start of the COVID-19 crisis, the Sunbelt sprinted, well outpacing the Midwest. On average, the Rust Belt cities gained a mere 5% a year; only Detroit, which rose from a sub-$100,000 base, and Grand Rapids showed large increases. All the others ambled onward between 36% (Pittsburgh) and 53% (Kansas City).
Many of the Southern and non-coastal Western venues did twice as well as the norm for their Midwestern peers. Prices in Phoenix, Las Vegas, and Boise more than doubled, and Austin, Colorado Springs, and Deltona jumped between 70% and 92%. Hence, in those eight years, Boise went from evenly priced with Omaha to 44% more expensive ($300,000 to $208,000), and Las Vegas rose to eclipse former equal St. Louis by 54% ($307,000 to $200,000). The distance between the two regions didn’t expand as fast for all metros. For example, the gap separating Austin and Kansas City expanded just a bit from 25% to 33%, and Deltona and Milwaukee, stayed shoulder to shoulder at around $220,000 each.
In that pre-pandemic period, mortgage rates didn’t provide a major tailwind, since they remained relatively constant, toggling in a narrow range between 3.5% and 4.5%. The force accounting for the wide disparity in appreciation between the two broad markets: the level of employment and wage growth. “Those are the factors that account for most of the relative price performance of different metros,” notes Pinto. “Cities such as Las Vegas, Phoenix, and Cape Coral had big population inflows, proved magnets for jobs, and enjoyed high-income growth.” He adds that the price upswing in those eight years would have been much bigger were it not for lots of new construction. “In strong metros, a high rate of newly built homes is what tamps down appreciation,” he says.
Mortgage rates and housing supply widen the gulf
In December of 2019, the 30-year mortgage rate sat at 3.7%, already well below its average over the past several years. “Then, the Fed spiked the punch bowl to 200 proof,” says Pinto. From mid-2020 to the fall of 2021, the rate hovered at all-time lows of under 3%. The fall in the buyers’ monthly nut proved a tonic for the entire nation, including the Rust Belt. From the close of 2020 to the price peak around May of 2022, our dozen locales typically gained 40% or so, an extraordinary advance in just 17 months for such traditional slowpokes.
Of course, the leap in mortgage rates from under 3% in October of 2021 to 7.62% on Oct. 10 of this year has hammered affordability everywhere. As Pinto points out, buyers are making the same monthly payment today on a sub-$150,000 house as they expended on a $350,000 manse just two years ago. “But the Midwest has two advantages,” he says. “First, it didn’t have nearly as big a run-up as did the Sunbelt following the pandemic, so it has a big price advantage compared to both 2012 and 2019. Second, the Rust Belt markets have extraordinarily low inventories.”
The number of listings, he notes, sits far below historical averages nationwide. “Across the U.S., inventories stand at 3.1 months, meaning all homes on the market today will be on average sold by mid-January, just over three months from now,” says Pinto. But the Midwest features stocks that are well below the national norms. Pittsburgh and Grand Rapids exemplify the ultra-tight conditions; they respectively harbor just a 2.6 and 2.0 months’ supply.
A principal reason the Midwest stocks remain so slender is the dearth of new building in these generally zoning-constrained metros. In addition, notes Pinto, the populations are older in these industrial cities. Compared with the Southern metros, they’re home to far fewer move-up buyers, young folks who put their starter homes on the market and go shopping for a bigger dwelling for the growing family, a dynamic that swells inventories. To be sure, the Rust Belt doesn’t get the same price pressure from wage and job growth. But for Pinto, superior affordability plus rock-bottom listings give the Midwest the edge. “The Midwest has everything going for it in terms of supply,” he says. “If you have enough buyers so that everything sells in less than three months, prices will still go up.”
How fast? Because of the rapid rise in rates, Pinto recently lowered his 2024 forecast for the nation as a whole from 7% to 4%. But he believes that the Midwestern markets can do better. “I wouldn’t be surprised if those metros increase by 6% or so next year. They didn’t experience the huge spike, and that’s working to their advantage today in terms of affordability. That‘s enabled those markets to just keep chugging while the formerly hot cities are pricing out loads of potential buyers.” Like the Mississippi River that bisects America’s heartland, these old-line markets just keep rolling along.
This article is part of Fortune’s quarterly investment guide for Q4 2023.
