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Will Mid-Sized Cities Rally the US Housing Market in 2017?

- By Nicholas Kitonyi

The U.S. housing market rallied in 2016 as house prices and lending continued to grow with mortgage rates remaining low for the larger part of the year. The U.S. federal reserve has signaled the possibility of another rate hike but the longer it took to increase interest rates, the more uncertainty brewed in the market, keeping mortgage rates low.


After the committee finally hiked rates in December, though, mortgage rates jumped to above 4% and since then, everything appears to be looking up in the U.S. housing market. One of the main forces driving the current outlook is the growth of the real estate market in medium-sized cities.

According to recent reports, housing in the up-market cities is proving expensive for residents, and this has forced some to opt for jobs in the medium-sized cities where housing is a lot more affordable. In addition, real estate and construction companies are also looking to expand their territories to these markets as the space in major cities runs out.

The interaction between jobs and homes is the dynamic people consider carefully before making one decision over the other. For instance, some might choose to live in a particular place because it is closer to where they work, while others might consider looking for a job in a place closer to their homes. Flip either side of the coin and the results are about the proximity between the two.

According to a report published by PWC last year, "Since 2002, job growth (in annual percentage terms) has been higher in the core than the periphery in the majority of top 40 U.S. metropolitan areas. That trend accelerated during the Great Recession and in the immediate post-recession years."

Per the findings, this was not only true for the main real estate magnates like New York City and San Francisco, but also for Austin, Charlotte, Nashville and Portland, as well as Hartford, Milwaukee, Philadelphia, Pittsburgh and Oklahoma City. The real estate market in the suburbs of emerging cities is being driven by the expanding employment opportunities, and realtors have realized this fact and taken full advantage of it.

For instance, Metro Cash Offer buys houses in and around the Oklahoma City area, and it claims that over the last couple of years it has seen a significant jump in inquiries as more people continue to seek residence in mid-sized cities with promising employment opportunities.

"People are looking at opportunities in places like New York and San Francisco, and they have a feeling that the gap is closing fast when compared to cities like Oklahoma, Austin, and Nashville among others. However, when it comes to housing and affordability, the gap is still huge," said a company representative in a recent statement.

Property management companies like Jones Lang LaSalle Inc. (JLL), however, are approaching the new markets with caution, citing liquidity and transparency as major factors. David Green-Morgan, JLL Global Capital Markets research director, said in a recent research note that "there are huge opportunities for emerging cities to capture a greater proportion of capital directed at real estate but, to do so, they will need to significantly improve transparency in order for investors to continue to gravitate toward the established investment market."

The company offers specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of about $6.8 billion and more than $59 billion in real estate assets under management, Jones Lang LaSalle is one of the largest real estate companies in the world, and currently, has a consensus analyst rating of "buy" with a target price of about $125.00. The company's stock is already up 14% year to date and given the current price target, it could easily rally a further 7% within the next few months.

Now, while the company's investment strategy focuses on the more liquid and transparent markets, the overall housing market in the U.S. appears to point towards an increase in activity in the mid-sized cities that do not necessarily offer the transparency cited by Jones Lang LaSalle.

Reports already indicate that over the last two years real estate has grown in the major cities. On the other hand, mid-sized cities have maintained their growth trend and have also been backed to spur growth in the overall U.S. housing market in 2017.

In summary, the U.S. real estate market has continued to rally despite the recent geopolitical activities in the country which saw Donald Trump become America's 45th president. The base interest rate is also expected to go higher again this year as the federal reserve looks to increase capital return on investment to investors.

This will likely continue to affect mortgage rates but so far, it appears lending activity has continued to rise. 2017 looks promising for real estate investors, but growth will likely come from an unlikely source.

Disclosure: I have no position in any stock mentioned in this article.

This article first appeared on GuruFocus.