Note: This is part one of a two-part series on suburban revival. Read part two here.
The suburbs are making a comeback.
The post-recession spike in large metro population clustering is now subsiding, according to recently released Census Bureau data. These new migration patterns indicate a shift to the suburban areas of large cities — i.e., people moving away from urban cores, but staying in the same housing market — as well as a pickup in population in smaller metropolitan areas, particularly in the Midwest and South.
Home price appreciation is perhaps one of the biggest drivers of this shift, as homeownership in large, urban areas has become unattainable for many consumers. Four of the nation's top five counties with the highest median home sales prices saw declines in net migration in 2017, according to a comparison of Census Bureau population statistics and home prices from Attom Data Solutions. Comparatively, counties that experienced the greatest increases in net migration had low median sales prices.
"The danger is, there are some patterns here that could head towards repeating some of the same mistakes during the last housing boom and what turned out to be a bubble," said Daren Blomquist, a senior vice president at the Irvine, Calif.-based real estate information and analytics firm.
"Short of that, it is a good trend that's diversifying who the housing market winners are in America. It's not just a few coastal markets, but there are a lot more places that are booming that are more geographically diverse," he said.
An optimistic take on this newly observed phenomenon is that it may help gradually ground home prices that have soared due to a lack of inventory in much of the nation's largest housing markets.
If this suburban migration continues, inventory may loosen as mobility increases and new opportunities emerge for homebuilders. It would also present a new opportunity for mortgage lenders to lend in small and emerging communities.
The large gains in population growth in urban areas following the Great Recession were driven largely by employment opportunities. But as the recovering economy paves the way for healthier wage and job growth, more positions are opening up outside of city centers. Plus, technology is giving more people the flexibility to work from home.
Evolving generational behaviors are also contributing to this trend, particularly among millennials. Through a combination of choice and harsh economic realities, millennials have delayed new household formation, homeownership and starting families. The improving economy has prompted more millennials to start to settle down, and they're choosing to do so in the suburbs.
This suburban shift is a tremendous benefit to the housing and mortgage industries. Greater mobility should shorten homeownership tenure and put more inventory on the market.
Mortgage lenders also stand to gain from these emerging opportunities in new markets. But to fully take advantage of this trend, lenders have to re-evaluate their customer acquisition strategies and adapt to new consumer behaviors.
It will behoove lenders to pay attention to these migration patterns as they dictate consumer behaviors, and ultimately, where the home sales are. What's more, technology will be essential for lenders to develop a presence in markets where they're not currently active.
In the early 2000s, small metropolitan growth surpassed that of large markets as consumers set roots in suburban areas. But after the Great Recession, consumers trended toward major urban markets. A portrait of the nation's population showed acute clustering in large metropolitan areas for the first half of the 2010 decade. Suburban growth halted and movement to cities hit a high in 2012 as urban core growth outpaced migration in the suburbs, according to William Frey, a demographer and senior fellow at the Brookings Institution.
But, changes in housing, the economy and consumer behavior paved the way for a return to previous population patterns.
It's important to note that while certain circumstances may mirror prerecession trends, like home prices nearing their precrisis highs and a gradual loosening of lending standards, borrower behaviors are different. Consumers are exhibiting more conservative attitudes toward lending, and changes in life cycles, particularly for millennials, have affected homeownership rates.
In recent years, limited home inventory and high demand have caused home prices to soar, creating affordability issues that are driving consumers away from some of the nation's hottest housing markets. But as the recovering economy puts more money in consumers' pockets, mobility has improved, as has job availability in areas outside of major urban hubs. That's made conditions in suburban areas and smaller markets more favorable.
Cue suburban revival.
In 2017, Los Angeles County, Calif., saw the second greatest migration decline of all counties, just behind Cook County, Ill., which is home to Chicago. Net migration in Los Angeles County fell by 42,836 people, and in Cook County it fell by 45,360.
These dispersal trends are evident in consumers moving both outside of city centers to new submarkets and neighboring counties, as well as to more rural, middle-of-the-country metros. Net migration in Riverside County, Calif., outside of Los Angeles, shot up by 23,397 people, the third largest migration increase of all counties last year. And while net migration in Harris County, Texas, declined by more than 10,300 people — fifth worst in the country — the other eight counties in the Houston metropolitan statistical area had a combined net migration of more than 43,000.
Likewise, the Dallas MSA had the most net migration, with a gain of 89,627 people last year. The median home price was $233,050, just below the national median, according to Attom.
Affordability challenges are perhaps the biggest driver of the suburbanization shift, as consumers trend away from urban cores.
"When housing supply is tight, I think people will start to look further in terms of what they can afford," said Andrew Schiller, CEO of Location Inc., a geo-analytics company that tracks and evaluates location-based data.
Home prices in several large cities have become unaffordable for median income earners, according to Attom, particularly in hot coastal markets, like New York and San Jose, whose main metro counties experienced declines in net migration, Census Bureau data shows.
Of the top 10 counties with the highest median home prices in the first quarter, eight reported negative net migration in 2017. The two exceptions were San Francisco and Alameda counties, both in the San Francisco metro area, where losses in domestic migration were offset by international migration.
In contrast, Maricopa County, Ariz., where Phoenix is the county seat, reported a gain of 49,770 people last year, the greatest increase in migration of all counties. Houses in the county had a median sales price of $248,000 in 1Q18, considerably lower than a hot urban market like New York County, N.Y.
The median sales price for homes in Manhattan was $1,405,000, according to Attom, while net migration fell by almost 4,000 people in 2017.
While home price appreciation and net migration are still being bolstered by international migration, domestic migration is largely responsible for the suburbanization patterns, and could eventually help tame housing costs.
What's more, many of the most expensive coastal markets now have to contend with new tax reform policies that make homeownership more expensive, namely lower federal deduction caps for state and local taxes and mortgage interest.