S&D IV: Population Growth and Trends

While our first 2 elements of housing demand were low interest rates and flexible loan programs, today's post will discuss additional factors that are propping up demand. The first of which is Population Growth. Remember that our core basis for real estate values revolves around supply and demand and that there are MANY factors that make up what we call the Demand Mix. One contributing factor to demand is the growth of population – in general more people equals more demand. We can look at this from a variety of levels:

1. Overall Global Trends and Foreign Investment– the population of the world is still increasing and is anticipated to increase according to a J-curve that levels off around 2030. And in the global picture, American real estate is still highly desirable. This small factor adds yet another layer to the overall American real estate Demand Mix.

2. American Trends – overall America 's population continues to increase with no slowdown in sight. Immigration is another contributing factor as home loans now exist even for those who cannot prove their Immigration status! Previously only a portion of Americans could be homeowners whereas now almost everyone has at least that potential. As America 's population continues to increase, expect additional overall demand for housing.

When it comes to population growth, we consider it a KEY factor to determining the exact market you desire investing in. Since our core fundamental belief about real estate investing concerns supply and demand, and interest rates and loan programs are fairly static across the country, individual city and state population growth trends are the primary factor we use in determining whether a particular location is viable for investing purposes. Census Bureau data projects the following Population Gains from now until 2030 in the following states:

1. California -- 400k net population gain/year

2. Florida     -- 400k net population gain/year

3. Texas       -- 400k net population gain/year

4. Arizona    -- 168k net population gain/year

Pay particular attention to these markets as they will have the greatest increase in DEMAND over the next 25 years. However, that alone does not make them the most attractive places to invest as other factors must be weighed such as projected supply of housing units in those states, how much the values have already risen in those states, if properties can still generate positive cash flow in those areas and a figure we call the “PGP ratio.”

The PGP ratio is simply a measure of the projected net population growth of a place(PG) divided by the total population of that place(P). So we're comparing how many people are going to be moving to say, Arizona , versus Arizona 's total population in order to get this PGP measurement, which is going to give us an overall measure of projected demand. The reason we use this ratio, rather than just the straight population growth figures themselves, is because everything in life is PROPORTIONATE and this ratio reflects proportion.

For example, we can look at California 's 400k annual projected growth and say that 400k is higher than the 168k projected for Arizona and so California must be better but when we do the PGP Ratio, we find a different answer:

California = 400,000 annual increase / 37,000,000 total population = .011 PGP Ratio

Arizona    = 168,000 annual increase / 5,000,000 total population = .033 PGP Ratio

Using this measure of proportions, we can see that Arizona will experience 3 times the overall demand than California and thus may be a “better” place to invest if you were judging it only on this one factor. Overall, this is a macro-factor about overriding population trends and so it's important to note population trends on a Local level are even more significant. The macro factors basically are pushing people in general towards or away from a particular state – but factors affecting individual communities within those cities and states have more impact, especially the local job markets.

The most significant general population trend in America is expected to occur from now through 2020 in which residents of the East, Midwest and Western Strip all gravitate toward the Mountain States. The Census Bureau estimates that the hottest states of population growth on a PGP basis will be: Arizona , Colorado , New Mexico , Utah , Montana , and Wyoming . While these markets may not be the hottest today, they are important to note as the median home prices in these states are well below the median of today's hot markets of Florida and California and therefore may have more room to grow.

Ultimately, Population Growth and Trends is just another contributing factor to the overall Demand Mix.