San Diego and Los Angeles were among the worst cities for real estate investment last year, according to a new report from Compound. The report analyzes single-family housing appreciation in the last 12 months and the volatility and risk of purchasing in each market. San Diego and Los Angeles fell at second and fourth on the 10 worst cities to invest in with 1.29% and 2.1% appreciation, respectively.
“These markets have relatively high volatility. When you invest in a market, you have to generate outsized returns to justify the risk,” Jesse Stein, founder of Compound, tells GlobeSt.com. “These markets can move 15% to 20% in a year, either on the upside or the downside. In investing in those markets, you need to be able to justify the risk that is associated with that volatility will be accompanied by outstanding returns.”
West Coast markets accounted for the top five cities on the “worst investments” list, with San Jose, San Francisco and Seattle rounding out the list. “The West Coast markets, which have done great over the last eight to 10 years, have slowed down over the last 12 months,” says Stein. “They are in a period of correction and they are volatile markets, and when you mix those two, they have under performed in the last 12 months.”
San Jose was the only market on the list to experience negative growth, at -0.34%, while the remaining markets had slowed appreciation. San Jose is the only market with negative appreciation over the last 12 months, and you could call that a correction, but that is after a huge run up, so it is a very minor correction,” says Stein. “In San Diego and Los Angeles, you have seen a slow down in the appreciation in the market.”
Stein doesn't have an opinion about what has caused the slow down in appreciation. He says that this is a natural evolution of the market—which has been rapidly expanding. “This is a natural correction based on the tremendous run up,” he says. Another factor is the tax reform, which has impacted states with larger property taxes. That put another dent in the market and it is making housing less affordable.”
While this data—which is from Zillow—illustrates slowed housing appreciation over the last 12 months, it isn't a prediction of the future or a suggestion of which markets are better for investment, according to Stein. “This is not our prediction of which cities will be good to invest in moving forward,” he says. “This is historical data of pricing trends over the last 12 months. We are not contending that San Diego, Los Angeles and Seattle are bad markets to invest in. Actually, our thesis is the exact opposite. We believe these larger cities are better investments than secondary and tertiary markets.”
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Kelsi Maree Borland
