Expensive Markets Are Surging—Here’s Where Investors Can Buy Big

Despite mortgage rate unpredictability, the real estate market is growing in some of the country’s priciest cities. According to the latest Zillow data, listings and homes going under contract have increased markedly in September. Cities at the top end of the market, such as Seattle, Los Angeles, and San Jose, showed the greatest gains.

“Generally, new listings and sales moved closer to pre-pandemic norms in September,” said Kara Ng, a housing economist at Zillow, told Yahoo! Finance. “That’s still a long way to go in terms of normalizing supply.”

Rate-Locked Buyers Come Off the Sidelines

The top end of the market had been stagnant amid the post-pandemic interest rate increase, with homeowners rate-locked and unwilling to give up sub-4% interest rates for 7% and higher. The recent movement at the high end could reflect optimism about future interest rate cuts and a desire to jump into the market before prices climb. It could also signal a pent-up need to move, which had been stalled amid interest rate and market uncertainty.

Despite a slight softening overall, with around 940,000 homes for sale nationwide in September, the market is still 23% below the level it was at the same time in 2019. However, according to Realtor.com data, listings were still up by 25% or more over the previous year in top-end cities and regions such as Seattle, Silicon Valley, Denver, and Washington, D.C.

Silicon Valley Has Helped Ease California’s High-End Market

The housing market on the West Coast has been a particular cause for concern in recent years, with 28% of the country’s homeless being in California. However, on the high end, a surge in tax revenue, particularly with high-flying Silicon Valley companies, could have also helped loosen the real estate market in some rate-locked regions, with employees choosing to cash out stocks for real estate.

Similarly, wealthier homeowners flush with cash would not be as affected by the fluctuations in mortgage rates as other buyers who need to borrow more. 

California Housing Trend Speaks for Pricier Homes Nationwide

The idea that the real estate market is increasingly polarized between the affluent and middle class is reflected in stats throughout the year. Redfin’s first-quarter report showed that overall real estate sales fell 4% nationwide. However, luxury real estate sales increased more than 2%, posting their best year-over-year gains in three years.

The real estate data and listing company’s second-quarter report showed that investor home purchases were up almost 30% in pricey West Coast markets such as San Jose and Las Vegas, followed by Sacramento, Los Angeles, and San Francisco. San Jose also saw the largest gain in overall home purchases, which rose 15.2% year over year in the second quarter. San Francisco came in second place.

Most of the investor activity was in the single-family home sector. Craig Pellegrini, a real estate agent in San Jose, said at the time of the report’s release in August:

“San Jose has a lot of overseas investors buying sight-unseen, and a lot of home flippers who are purchasing dilapidated homes, putting some lipstick on them, and selling them for a profit. I’m also seeing parents buy second homes that they plan to rent out for a while and then pass on to their kids, some of whom just graduated college and can’t afford to buy themselves.”

Zillow’s price index report for September (previously mentioned) echoes the market trend. On the upper end, interest rates are less of a concern for cash-rich buyers, who are making moves now before prices increase amid further rate cuts.

The Outlook for the California Housing Market in 2025

The trajectory for increased activity in the upper end of the market is reflected in the outlook for the California market in 2025, according to the California Association of Realtors. CAR president Melanie Barker, a Yosemite Realtor, said in a press release:

“An increase in homes for sale, along with lower borrowing costs, is expected to entice more buyers and sellers to enter the market in 2025. Demand will grow as we start the year with the lowest interest rates in more than two years, particularly for first-time buyers. Meanwhile, would-be home sellers, held back by the ‘lock-in effect,’ will have more flexibility to pursue a home that better suits their needs as mortgage rates continue to decline.”

CAR senior vice president and chief economist Jordan Levine added:

“Inventory is expected to loosen as rates ease; demand will also increase with lower mortgage rates and limited housing supply, which will push home prices higher next year. Price growth is expected to be slower, but the housing shortage will keep the market competitive outside of big economic shocks, so prices will still rise.”

How Investors Can Capitalize on Increased Liquidity in the Top-End Markets

All this sounds great. But how do you make the most of it as an investor? Here are some strategies.

Target emerging markets located around pricier ones

Buying on the border of some expensive real estate markets is a trusted strategy when predicting where to invest, as there will always be people priced out of expensive cities. Whether investors flip homes or rent, there is likely to be high demand for housing here. Examine the emerging markets for investment around these cities, and you’ll be on secure footing.

Flip homes

The risks and rewards are both high when flipping homes in expensive cities. However, if you’re a well-funded house flipper, flipping here makes sense because the demand for housing will always be there. Assuming you buy right, there is plenty of scope for high profits, even if you are tearing down an older home, building a new one, or simply doing a cosmetic upgrade. 

Team up with wealthier residents to do deals

Many residents of expensive cities are flush with cash but don’t have the time outside their primary jobs to invest in real estate. That’s where a knowledgeable, well-organized investor comes in. 

Borrowing large sums of money or teaming up with a well-heeled silent partner requires a highly competent flipper with a good track record who can deliver on their objectives and has a solid contingency plan for any potential downsides, where the investor is protected as much as possible.

Wholesale deals for high profits

In expensive markets, wholesalers must be credible and adhere strictly to local real estate guidelines. If that means closing deals before selling, they will need the cash to absorb the expenses. However, the potential profits could be high because of the price points.

Purchase long-term rentals for equity appreciation and cash flow

One advantage of buying deals in expensive cities is that eventually, the market corrects many mistakes because properties continue to rise in price. Conservative investors can build their net worth simply by holding on to a property that pays for itself with rental income but accrues appreciation. Over time, with rental increases and mortgage paydown, these pricier assets will start cash flowing, too. 

Final Thoughts

Timing emerging markets is where the gold is in real estate, but it’s also a risky endeavor, as it could mean being saddled with homes that don’t turn the corner as quickly as hoped. 

If you can afford it, buying in already-established markets is a safe move with few downsides, as long as you do not over-leverage. Given the market cycle, buying now as the market rises as rates eventually drop could be a good move. 

However, with an election and a new president, many investors have put buying plans on hold, regardless of the outcome. This might represent a gap in the market for bullish, well-funded buyers to make a move.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.