Plotting For Profits On The Home-Price Highway

The Home-Price Highway

There’s a more elaborate model for this,” explains Gregor Schubert, a faculty economist at UCLA’s Anderson School of Management, “but the intuition is that migration ultimately works as an escape valve or arbitrage mechanism for spatial differences.” In the working paper, House Price Contagion and U.S. City Migration Networks, Schubert models how large, job-creating superstar cities reliably feed residents (à la borrowers) to the same smaller, second-tier cities when the superstar cities experience wage shocks or surges in housing costs.

Because a rising tide lifts all boats, housing booms predictably followed in the smaller markets forced to float the rafts of new residents. In other words: when surging home prices, disruptions to the labor market, or even public health crises like the Covid-19 pandemic prompt migration from superstar cities like Los Angeles, San Francisco, Boston, or New York, smaller markets with strong, long-standing connections to those cities regularly experience home price escalation. Historically, cities with five- or six-digit populations especially struggle to absorb even a modest amount of migration in-flows. 

Kortney Lane-Schafers, regional director of growth at Mobility Market Intelligence, a data solutions provider for the real estate industry, says worker migration patterns prove particularly helpful when combined with other borrower information, such as income level, ethnicity, field of employment, or past purchase history. Framing increased worker migration through fields of employment, for example, can help lenders and loan officers forecast where mortgage demand might rise or fall as certain industries expand or contract. 

Taking origin city into account, past purchase history can help to highlight the amenities that make certain second-tier cities more attractive to workers of a certain income level, ethnicity, or political bent. “What if you notice,” she posits, “that this certain ethnicity is really making this big move into this area? Why wouldn’t we cater to that by recruiting loan officers that speak that same language?” Complementing that borrower-level recruitment strategy, loan officers might offer homeownership education classes targeting that growing demographic, building bridges that lead to future business. 

These connected markets have existed for decades and will endure, though evolve, into the future because worker migration networks function as a circulatory system for the broader housing market. Worker migrants act like red blood cells, fueling national and regional housing cycles by transporting mortgage demand, or oxygen, throughout the country. “Without worker mobility,” Schubert says, “the spread in house price growth across cities in response to wage shocks would be 65-70% larger.” Patterns in worker migration cut the key for unlocking future business by creating an origination overlay for anticipating rises in mortgage demand, home prices, and residential construction years before they happen, even far from major job markets. 

With housing affordability at historic lows and long-held fears of a recession lingering for 2024, any significant rise in unemployment or home prices could spark an increase in worker migration, thus mortgage demand, thus home prices, between connected markets. Informing business strategies ranging from lead generation and customer management to risk exposure and hiring, Schubert’s research underscores how mortgage companies can court borrowers in connected markets by anticipating, literally, their borrowers’ next moves.

Origin Informs Destination

In 1990, Boise, Idaho, had a population of 135,000 and sat a day’s drive from the nearest major job market, be it Seattle or San Francisco. Three decades later, the former enclave for Basque immigrants from north-central Spain and long-time home of Micron Technologies, a global leader in semiconductor manufacturing, still sits a day’s drive from the nearest major job market but has added 100,000 residents – a 76% increase – and become one of the country’s fastest appreciating regional housing markets. 

For the most part, Schubert does not speculate on why certain workers from certain superstar cities migrate to the same second-tier cities year after year. The fact is: they do, and will continue to, no matter the historical or future causes. About 80% of the migration links Schubert modelled between origin and destination cities stayed the same over a 10-year period. Instead, the presence of long-standing links between connected markets shows that a worker’s origin city, not their reason for fleeing it, proves a stronger determinant of a worker’s destination city. 

Workers fleeing cities in coastal California, for example, must search relatively far away to find an affordable alternative. “If you’re just moving within 50 to 100 miles, everything around you is equally expensive. Your ability to move to somewhere more affordable is limited by the network of cities around you,” Schubert says. However, workers fleeing South Boston’s surging prices can find more, less-expensive cities in the surrounding area – cities like Worcester, Mass., Hartford, Conn., Manchester, N.H., or Providence, R.I. “That’s the function of this network of cities around you and how affordable they are relative to where you’re coming from,” he explains. 

That network of cities has a network of real estate agents, too, Lane-Schafers says. In addition to targeting subsets of borrowers, an individual loan officer who is active in L.A., say, could target active real estate agents in Boise, Las Vegas, or Phoenix, three second-tier cities with strong migration links to L.A. Even better, she says, if the loan officer and real estate agent have closed deals together before. “The agent is a customer as well, right? We’ve all heard the proven fact that it’s easier to get existing business from an existing customer than it is to have to go find brand new customers.” Placing just one pre-qualified buyer into that real estate agent’s hands can wet the pen for future dealings if and when the second-tier city starts to experience elevated rates of in-migration or home price escalation.

As far back as 1990, workers consistently migrated to Boise from L.A. and San Francisco. The approach of Y2K brought upward pressure on home prices, amplifying that trend; job creation driven by tech companies brought a steady stream of well-compensated tech workers to those major job centers. Most residents leaving L.A. or San Francisco found new jobs and homes in local exurbs or other major job markets. But many, predictably, trucked their families and belongings up the well-worn road to Boise. 

When the S&P CoreLogic Case-Shiller Index was showing national average home price growth of 1.4% in 1993, it was 9.4% in Boise. In 2005, home prices jumped 14% nationally, but 24.5% in Boise. In 2021, as the pandemic accelerated worker migration from a number of superstar cities, Boise home prices rose 28.7% against a national average of 17%. 

A lack of spoiler alerts may be the greatest limitation of Schubert’s study; he left his orange crayon at home and neglected to underline specific origin and destination cities poised for home price escalation or increased out-migration. Nevertheless, the long-term impact of worker migration on Boise’s housing market underscores how nascent mortgage demand exists in regional markets with long-standing links to job-creating superstar cities – workers found their way to Boise because they began in L.A. 

Shared Exposure, Shared Risks

The enduring nature of migration networks between certain U.S. cities helps to explain why the national home price boom between 2000 and 2007 still left home prices in two-thirds of U.S. counties up less than 5%. By modeling the impact on second-tier cities of home price increases in superstar cities during the pandemic (2020-2022), Schubert found that cities with the top 20% of exposure to superstar cities – as measured by the volume of in-migration from superstar cities – saw 2.8% higher annual home price growth than the group with the lowest exposure. 

The takeaway is home price escalation tends to concentrate in connected markets because only a limited number of cities serve as origins or destinations for substantial numbers of migrant outflows or inflows. Cohorts of second-tier cities behave in tandem because they share exposures to the same superstar cities. Boise, Las Vegas, and Phoenix – seemingly disparate housing markets – share similar housing cycles because their housing markets are largely driven by migration out of a handful of cities in coastal California. 

When it comes to market risk exposure for lenders and loan officers, “finding housing markets that are not driven by the same kinds of superstars that they’re exposed to, or that don’t have the same sort of migration network, might be a nice way of diversifying,” Schubert advises. To the extent that far-flung cohorts of second-tier cities share exposure to the same shocks impacting superstar cities, comparing lending in well-connected second-tier cities against home price changes and employment conditions in superstar cities should help mortgage companies reconsider their market risk exposure. At the same time, lenders can hack historical migration networks to balance market risk with future growth. 

Enhancing the accuracy with which lenders can predict escalating home prices or mortgage demand in smaller markets ought to enhance the accuracy of their “net present value,” or future profitability calculations, particularly with new branches, says Preetam Purohit, head of hedging and analytics at Embrace Home Loans. After all, he says, new branches are but loss-making entities projected to be profitable in the future. Projected home price appreciation plays a central role in determining where to open new branches or expand operations more generally. 

Near-Term Outcomes

Because the number of potential outcomes increases the further one projects into the future, lenders tend to employ a probability multiplier (like 0.2%) to calculate the present value for cash flows more than five years in the future. The fact that U.S. migration networks are historical and enduring should offer lenders greater confidence in these calculations if they expand into smaller markets with strong connections to superstar cities, Purohit says. Expanding exclusively in markets with strong connections to superstar cities would amplify the accuracy of net present value calculations, granting lenders greater license to bank on future cash flows.

And yet, the inverse of Schubert’s findings is also true: smaller markets with limited or no connections to superstar cities are far less sensitive to home price escalation or wage shocks in superstar cities. Recall, home prices in two-thirds of U.S. counties appreciated less than 5% in the run-up to the Great Financial Crisis. Home prices prove more stable in less-connected markets, but generally fewer homes change hands. The ham can be sliced even thinner, too, when taking regional and local markets into account. The West Coast acts very differently than how East Coast acts,” says Purohit. “If you see that there is home price appreciation, or significant home price appreciation that is forecasted, that increases your probability of opening up a branch there.”

However, nascent mortgage demand does exist in less-connected markets, and lenders and investors can use Schubert’s research to identify second-tier cities that may be only steps from the red carpet – the next Nashville, the next Boise, the next Tucson, the next Austin. 

“Lenders could do well,” Schubert says, “by expanding into areas of the country that are not as correlated with the overall cycle or are uncorrelated with particular geographies that they already have exposure to.” Established migration networks criss-cross national and regional housing markets constantly in flux. Whether regional housing cycles follow or flaunt national mortgage trends, the home-price highway offers one means of predicting which regional markets are ripe for expansion – or exit. “The same way that we form more diversified portfolios of stocks, they could have more diverse portfolios of lending.” 

Housing Booms Follow 

Meridian, Idaho, slightly west of Boise, has bathed in the glow of Boise’s rising star for years. But so have Caldwell, Kuna, Nampa, Middleton, and Garden City, other Idaho municipalities that have enjoyed the Boise metro’s decades-long influx of migrants and mortgage demand. This regional housing market has long served as proof of Schubert’s thesis: workers have an outsized impact on the smaller markets to which they migrate; where workers go, housing booms follow.

The ability to anticipate regional housing booms provides additional assurances for lenders’ growth strategies, particularly from the perspective of lenders’ profit margins. Beginning in the second quarter of 2022, mortgage companies have reported losses on net production income for six consecutive quarters. Mortgage companies incurred a pre-tax net loss of $1,015 on each loan they originated in the third quarter of 2023, up from $534 per loan in the second quarter. 

Declining profitability on individual loans, Purohit notes, has lenders looking for fewer loans, but larger loan sizes. If a lender’s margin is 2%, she earns $5,000 on the $250,000 loan, but $10,000 on a $500,000 loan, while the origination cost remains essentially the same for each. “It’s not like 2%, 3%,” Purohit says.  “It’s like, am I making 10 grand on a loan? 15 grand? 20 grand? What is my dollar amount that I’m making on every loan?” Expanding into a well-connected second-tier city carries the promise of consistent home price appreciation, meaning lenders can bank on improved profitability as the smaller market matures by closing a greater percentage of loans with increasingly larger loan amounts.

Since 1990, Meridian has quietly experienced an 11-fold (1,100%) population increase from nearly 10,000 residents in 1990 to nearly 126,000 in 2021. In 2014, the median home sale price in Meridian was $219,900. The median sale price rose to $336,990 in 2019, then $511,500 as of September 2023. Similarly dramatic home price appreciation has occurred throughout the Boise metro area. Schubert says the contagious nature of home price trends explains why worker migration can transform some formerly regional hubs into second-tier cities that experience the kind of dramatic home price escalation typically associated with major metros. 

In most cases, the exchange of workers between superstar cities (say, between L.A. and San Francisco) will not dramatically alter either city’s housing market. However, places with five- or six-figure populations can struggle to absorb even a modest number of newcomers. Disruptions to local housing supply and demand permeate regional market dynamics, leading to cascading home price escalation and increased migration within the regional market as workers and families who already lived in Jacksonville, for example, quickly find themselves priced-out.

The degree to which a smaller market is connected to one or more superstar cities, however, plays a crucial role in determining whether a housing boom will occur if or when that smaller market experiences increased in-migration. 

Historically, Naples, Fla., Spokane, Wash., and Boise, have received a much larger portion of domestic immigrants from superstar cities than Toledo, Kan., St. Louis, Mo., or Minneapolis, Minn., according to historical data. Schubert’s modelling shows cities with less than 8% of in-migration from superstar cities, such as Toledo, St. Louis, and Minneapolis, experienced home price growth of less than 10% during the pandemic. While home price fluctuation typically tracks more closely with local economic conditions such as industrial expansion or barriers to new home construction, considering exposure level in second-tier cities alongside housing shocks in connected superstar cities accounted for about 32% of the home price differences. 

Migration Works In Reverse, But … 

The sensitivity and cyclicality of the housing market tends to make mortgage bankers highly responsive to current economic conditions, and somewhat less concerned with how the market will behave in a decade. Which is not to say that mortgage bankers pooh-pooh five-year plans, only that those plans are highly fluid.

Except for the period immediately following the Great Financial Crisis, U.S. home prices have mostly risen over the past three decades. With long-held fears of a recession lingering for 2024, the future movements of home prices and mortgage demand remain uncertain. The Fed’s inflation policies have yet to constrain employment or home prices. Schubert posits, however, migration patterns should work in reverse if home prices drop or labor conditions improve in superstar cities. 

“The prediction,” he says, “would be that you see some workers from nearby cities returning to those cities as there’s a certain price at which moving back into New York becomes attractive.” Second-tier cities near and far with migratory links to New York City would likely experience an outflow of residents and, depending on the size of the exodus, a drop in home prices and mortgage demand regionally. 

The digital nature of today’s mortgage market means many lenders and loan officers can originate loans all over the country and pivot to new markets relatively quickly, Purohit points out. The permanent transition to remote work for a large portion of the labor force has fundamentally altered the “where” and “why” of housing demand. Using Schubert’s research on migration patterns to locate nascent mortgage demand does not require a physical presence in well-connected second-tier cities or regional markets. 

But, Purohit acknowledges, a physical presence helps, making inorganic growth through acquisitions a viable option for mortgage companies wanting to recruit where they see increased migrant in-flows or escalating home prices. Many smaller retail shops are looking for an exit because of the current market outlook. Larger mortgage companies may find the opportunity to acquire market share in smaller emerging markets by acquiring these smaller lenders – “I mean, right now the valuations are really low” – and their production teams. 

Decades-long housing supply shortages will probably prevent home prices from dropping low enough to entice significant numbers of workers to return to superstar cities once they have relocated, Schubert believes. “The supply constraints in a lot of these cities are binding enough that it is unlikely that house prices will fall substantially.” Even if a large number of higher-income earners suddenly experienced a significant wage cut, too much pent-up demand exists from homebuyers who want to move into superstar cities, but have been unsuccessful so far.

Rather than falling home prices, macroeconomic shocks – the Covid-19 pandemic, the rise of artificial intelligence, environmental disasters – seem more likely to drive worker migration between connected cities in the future. On a national scale, the pandemic complicated Schubert’s ability to model how wage shocks and home price escalation drove worker migration inflows and outflows. Yet, the pandemic did provide additional evidence that when workers migrate, especially en masse, they follow in the footsteps of those who went (That way!) before.