And It’s an Investment Opportunity
TL;DR
Some of the costliest housing markets in the U.S. remain the most desirable. It seems counterintuitive, but there’s data backing it. And, of course, there’s an investing angle.
Google Trends can tell us a lot. They’re a fairly accurate gauge of what’s on people’s minds any given day.
Yesterday, for instance, +2 million search terms included “Kris Kristofferson” in the wake of the singer/songwriter/actor’s death at age 88.
And +1 million people searched for “Verizon” after thousands of the telecom giant’s customers reported wireless outages.
Hurricane Helen was the #1 search query over the past seven days. And since March, searches for “Diddy” and “1,000 bottles of baby oil” have increased by as much as 650%. (If you’re unsure why those two things are related, do yourself a favor and keep it that way.)
But for those looking for investment opportunities, Google Trends can provide some interesting insights. But before we get there, buckle up because this one’s a doozy.
Google Trends & Housing Data
Over the past year, a company called Highland Cabinetry analyzed every U.S. state to identify those with the highest preferences among prospective homebuyers.
And it did so using Google Trends based on search term volume.
The findings were interesting. Evidently, many of the ones with the most interest among potential buyers were the same high-cost-of-living states that news outlets spent the last several years telling us that people were vacating.
And while it’s true that many of those states saw mass exoduses during and after the pandemic, news stories typically failed to mention how those numbers were sometimes offset by inflows of new residents.
So before we dive into the study’s findings, let’s first discuss how …
Data Doesn’t Lie, People Do
Exhibit #1: California, whose outflows have been well-reported, but oddly little mention is ever made of how the state has been experiencing net losses since the ‘90s. In fact, 1995 saw more people leave than at the peak of the pandemic:
Also rarely mentioned is how 6.3 million Americans moved to California between 2010 and 2022.
Texas, whose residential inflows have been well-publicized, is another case study. While the Lone Star State saw 53,000 households relocate from California between 2020 and 2021, over 21,000 households moved from Texas to California while nearly 21,000 households moved from Texas to Florida.
But if mainstream media presented both sides of a story from an objective standpoint, we wouldn’t have to fill in some of those glaringly obvious gaps each week.
Side note: A major draw for Texas is its lack of income tax, but many new residents find themselves disaffected after learning that the state government makes up for it with sixth-highest property taxes in the country — which are 124% higher than they are in California.
And while sh*tting on a state that doesn’t allow women to abort fetuses conceived via rape or incest is soundly in our wheelhouse, we’re very aware of the many reasons people have left California in droves. Like this. Or this belated effort. And this. But almost definitely this.
Nonetheless, here we are in H2 2024 with a housing market allegedly undergoing a dramatic shift. Yet somehow the aforementioned study of housing market interest and Google Trends indicates that prospective buyers remain interested in these costly markets, with the top five states — in order — being:
- California
- New York
- Florida
- New Jersey
- Texas
We don’t think anyone could compile a list of U.S. states that receive more criticism than those five. Yet they are still home to the hottest housing markets in America.
Rate Cuts Are Reinvigorating Buyers
Since inflation subsided to 2.5% and the Federal Reserve cut its benchmark interest rate last month, mortgage applications reached their highest levels since July 2022 while mortgage refinancing reached its highest level since April 2022.
And from 2022 to now, the housing market hasn’t even taken a breath, continuing a pattern that’s been ongoing since the 2008 global financial crisis that was sparked by — you guessed it —overinflated housing:
But people continue to flock to these five states with elevated preference scores despite:
- Six-figure incomes being considered middle class in California
- New York having a state income tax as high as 10.9%
- Mafia-style insurance companies extorting Florida residents
- New Jersey’s 2.23% property tax rate
- And Texas refusing to modernize its power grid, which was built in 1924.
But according to the compiled Google Trends data, those states exhibit the highest demand in the country, with scores of 75.8, 64.1, 62.2, 58.7 and 55.8.
And before we move on to the investment opportunity, we want to be fair and note that there are plenty of good things about each of those states.
California has 840 miles of breathtaking coastline. New York has the best pizza in the word (yeah, we’re putting you on blast, Neapolitan style). Florida’s the sportfishing capital of the world. New Jersey’s music scene has given us Sinatra, The Boss, Jon Bon Jovi and Naughty by Nature. And Texas …
So like we said, there’s an investment opportunity here.
Residential REITs
We’ve discussed REITs — or real estate investment trusts — before. They’re a popular asset class for yield-oriented investors because, by law, they must pay out 90% of their taxable income to shareholders as dividends.
And while we’re more bullish on REITs that specialize in industrial property, data centers (especially those focused on AI) and cell towers, there’s plenty to like about the resurgence of residential REITs.
And since we already took a deep dive into how bonkers America’s housing market is, we’re going to very quickly discuss a few ways investors can play it.
Homebuilder REITs are the most obvious and direct approach. PulteGroup (PHM) is a major player with a nearly $30 billion market cap and a 0.56% dividend. Shares are up 40.95% this year compared to the broad market’s 21.50% gain.
If it’s dividend yield that motivates you, ARMOUR Residential (ARR) spins off 14.12% and it’s up 8.05% this year. Note: REIT dividends are not qualified, meaning that unless you’re holding them in a Roth account, they’re taxed as ordinary income and not capital gains.
And if you’re an ETF investor looking for broader exposure, Hoya Capital Housing ETF (HOMZ) yields 1.79% and has seen its shares gain 20.94% this year.
Here are those three equities’ year-to-date performances, with PHM in blue, ARMOUR in red and HOMZ in green:
