Home prices across the U.S. rose 6.96% in 2019, the largest annual increase in more than a decade, according to Radian Home Price Index (HPI) data. The 6.96% annual gain from December 2018 to December 2019, was down slightly from the year-over-year increase of 7.98% reported at the end of the Q3 2019.
Nationally, 2019 will be remembered for having the 5th strongest rate of home price appreciation recorded over the last two decades. The years from 2002-2005 recorded the four strongest annual rates. Practically speaking, it shouldn’t be a surprise that areas hardest hit during the Great Recession could appreciate faster than other, less impacted markets. In the years since their recession troughs, home prices have risen nationally with the West having notably accelerated ahead of the rest of the country.
Most recently, however, the Midwest has emerged as one of the fastest appreciating housing markets in the country, reversing years of lagging growth, even after bottoming. Data from the Radian HPI has shown the Midwest pulling ahead of the pack for the first time following the Great Recession. In fact, of the six major geographic regions tracked by Radian HPI, the Midwest ranked first for housing price growth between 2018 and 2020, with an 8.6% year-on-year gain in 2019.
A deeper analysis of the Radian HPI data shows that four states, in particular, helped propel the Midwest region forward. Over the last couple of years, home price appreciation has generally been strong across Midwest states, however, home prices in Michigan, Minnesota, Wisconsin, and Ohio all grew at faster rates in comparison to other states in the region.
Another interesting observation was that the appreciation rates of smaller Midwestern homes grew faster than in other parts of the country. Since 2018, smaller (two- and three-bedroom) homes in the Midwest appreciated at a faster rate than similar-sized homes in other regions, after previously appreciating more slowly. When comparing regions by square footage, Midwestern homes under 1,500-square-feet and between 1,500 and 2,500-square-feet ranked highest for fastest growth from 2018-2020, compared to third and fourth place when looking at the same square footage across the last decade. In contrast, the Northeast ranks last regardless of home sizes, a trend that has only gotten worse in the last decade.
Days on the market (DOM), another insightful metric of housing market strength, shows sales quickening in the Midwest. Shorter DOM reflects a more active market, or one in more demand. In 2016, only one Midwestern state, Nebraska, was in the top five nationally for shortest DOM compared to four of the top six—Indiana, Ohio, Michigan, Nebraska—in the first quarter of 2020. In fact, only three Midwestern states—Nebraska, Michigan, Kansas—were in the top 15 nationally shortest DOM in 2016 compared with six today—Indiana, Ohio, Michigan, Nebraska, Minnesota, and Missouri. Those Midwestern states have an average DOM that is as much as 25% faster to sell than the national average.
What’s driving the growth in the Midwestern states?
While millennials are commonly considered [1] to be an important factor in the growth of the Midwest market, they alone do not explain why home prices are rising so quickly. We do know that Michigan, Ohio, and Illinois have three of the largest populations of millennials in the Midwest. While some of the larger cities in the aforementioned states are home to large numbers of millennials, some also have more millennials living at home.
Urban renewal is another possibility. Many Midwestern cities have enjoyed elevated levels of gentrification and renewal. However, it is not clear that even urban renewal in cities like Detroit, while a welcome and long-overdue development, accounts for the broad outsized growth, as opposed to benefits in highly focused areas.
One thing that we believe could be ruled out as a deterrent for buyers—extreme weather events, like the historic floods that have impacted large parts of this region over the last few years. According to a recent survey [2], only 23% of respondents in the Midwest said that natural disasters seriously impact their real estate decisions, the lowest share of any geographic area surveyed.
Possibly one of the largest reasons for growth, according to the Radian HPI, and much of the reason for the region’s bolstering appeal, is the relative affordability of the Midwestern markets combined with solid employment numbers. For example, according to the 2018 United States Census data, Minnesota enjoyed a median household income of only $5,000 less than that of California, however, the median home price in California is more than $250,000 higher. Both Ohio and Indiana have median household incomes higher than those found in Florida, however, the Midwestern states enjoy more than $100,000 lower median home prices than the sunshine state. The results of this are seen across many individual cities in these states.
- Columbus, Ohio, has a strong job market [3] with a broad base of financial and non-financial corporate employers and has enjoyed healthy growth, while limited on-market supply has pushed up housing prices in recent years. However, the city’s low cost of living helps attract and keep residents.
- Milwaukee has also benefited from low inventory and increased demand. Milwaukee millennials are competing to buy in the city’s neighborhoods and are being joined by empty-nesters seeking to downsize in nice, walkable areas. Even with this renewed interest in Milwaukee, homes are still more affordable there than in many other parts of the country.
- Grand Rapids Michigan, is the second-largest city in Michigan and its metro area is one of the fastest-growing, according to data from the Census Bureau. The metro has a large millennial population [4], which indicates a substantial number of potential first-time homebuyers, a diverse economy including health care [5], information technology, automotive [6], aviation, consumer goods, and manufacturing industries, among others.
As reviewed, there is an interplay of factors driving the strong growth in Midwestern home prices with changing household demographics, income growth and affordability all playing some role.
Analyzing real estate markets with enough granularity to gain real insights has historically been difficult. But new analytical tools such as the Radian HPI have made it easier to see what’s actually happening on a regional, state, metropolitan and even zip code level. And those tool’s ability to segment markets into finite attributes like bedroom counts or square footage reveal some very promising trends that were previously obscured.