The news that gross domestic product grew at a 2.8 percent annual rate in the third quarter might quell fears that high interest rates have crippled the economy. But a closer look at the numbers paints a less certain scenario.
CHARLESTON SC – downtown Charleston South Carolina (Photo by Paul Harris/Getty Images)
Healthcare spending has been a persistently high contributor to recent growth, and now accounts for 17 percent of GDP. And defense spending in the third quarter was at the highest level in years. Consumers paying bigger medical bills and the Pentagon buying more bombs is a poor recipe for sustainable growth.
A truer measure of current growth – and one more relevant to real estate – comes from the latest job data, which shows that the number of people with jobs increased just 1.2 percent in the past year. Manufacturing provided zero new jobs the last two years, as did business services – the largest sector of the economy and usually the engine of growth. In addition, many of the recent “new jobs” are just rehires for pandemic-created vacancies at nursing homes and universities.
We’re looking at a slow economy in the next few years – even as interest rates bump lower, and therefore a slow real estate market.
The run up in home prices has left them so high that lower interest rates won’t change that very much – it will be years before incomes catch up and buyers can qualify for those bigger mortgages- which means that prices at best will be flat and in some local markets will come down.
In this uncertain situation, what’s an investor to do? Look for local markets with good fundamental growth and put your money there.
By fundamental, I mean markets that don’t depend on the healthcare sector or government sector for long-term growth.
Here are fifteen local markets with good population growth and a good increase of jobs OTHER than those in healthcare and government. In these markets we can expect good sustainable growth, which in turn means good support for home prices and rents. With the price boom over, the stability of local economies will play a more important role for real estate investors.
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