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.