By Tyler Barry, Acquisitions Analyst, Marketplace Homes
If you’re an investor, you’ve read the articles and you’ve heard the pitch countless times: “This market is HOT!” But what happens when the heat fades and we look back on how previously “hot” markets have performed? The picture the numbers paint might surprise you.
Supply, Demand, and Why Hot Markets Are Volatile
The real estate market follows the same economic logic as every other industry. It is a simple calculation of supply vs. demand. Hot markets are volatile. Demand increases, making that market an industry darling. But when builders start pouring in and community developments take years, any cooldown in demand coupled with forward supply increases can cause a sharp correction.
Conversely, some markets never make the top 10 lists because they’re too stable. Investors who plan on holding their assets for an extended period of time need to analyze their risk tolerances and goals before writing off the stable markets. Of course, population growth matters, but it’s important to analyze the type of growth. Growth driven by household formation and retained graduates tends to be stickier than the streaky growth tied to migration.
Case Study: Austin, TX
Heading into 2022, countless talking heads were covering this market as the best place to buy. They had reason for doing so, the price per square foot had risen more than 50% between when the Covid lockdown started and the end of 2021. People were migrating into Austin and jobs were being created at a record clip.
During the rise, however, builders started planning their communities. As this new inventory came online coupled with a slowdown in demand due to lower migration, things began to crumble. The Austin-area MLS shows a peak of $324 per square foot for sales in May 2022. From there, prices have slid all the way to an average of $250 per square foot for homes sold in August 2026, a nearly 23% decline. If the market turns around today and starts appreciating by 2.5% per year, it will take 10 years to get back to peak post-pandemic pricing.
Case Study: Cleveland, OH
Cleveland was not making headlines post-pandemic, as there wasn’t a ton of migration. Appreciation was there, but it wasn’t as explosive as some of the “hot” markets. The difference is that builders didn’t pile into Cleveland to increase supply. Demand has stayed steady due to high rates of household formation and the blue-collar nature of the local economy.
While Austin has corrected 23%, Cleveland prices are up about 18% over that same time period.
The Takeaway
These two markets had very different sentiments post-Covid, and it isn’t the “hot market” that has outperformed. Stick to fundamentals instead of headlines, have patience, and watch the value of your portfolio expand.