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Location, location, location: Why geography matters

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All real estate is local

The real estate recovery has been uneven. Some parts of the country are outperforming others. As you can see from the chart below, the Pacific and Mountain states outperformed the rest of the country over the past two years. The Middle Atlantic and New England states have underperformed.

There are many reasons why a region may outperform another region. The biggest reason is usually the economy’s underlying performance.

FHFA HPI Geographic

We’ve seen strong price appreciation in the energy-intensive states including Texas and North Dakota. These states have high-paying jobs that attract workers. This has created housing shortages, especially in North Dakota. They can’t build houses fast enough.

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In contrast, the Rust Belt states have been struggling for decades. Their populations are shrinking. Detroit is so bad that the city may end up destroying entire neighborhoods and turning the areas into farmland. The northeast continues to struggle as the financial industry shrinks. California is benefiting from a technology boom.

Regulatory differences

Another important difference is that some states have very borrower-friendly—or creditor-unfriendly—policies. These policies slow down price appreciation. For example, some states require a judge to approve all foreclosures. Other states have a streamlined process. New York state is known for how long a person can live in their home without paying their mortgage. It can go on for years.

As a result, New York, New Jersey, and Connecticut haven’t made much of a dent in foreclosed homes’ shadow inventory. Meanwhile, states like California dealt with the pipeline years ago. This explains why prices are rising in California but still falling in New York.

Implications for homebuilders

What this means when you want to invest in builders is that you have to pay attention to geographic exposure. For example, a builder that’s based on the West Coast—such as KB Home (KBH) or Standard Pacific Homes (SPF)—may be in a more attractive area than a mid-Atlantic builder—such as NVR, Inc. (NVR)—or a geographically diverse builder—such as PulteGroup, Inc. (PHM).

Investors who are more comfortable not making geographic bets should look at the SPDR S&P Homebuilders ETF (XHB).

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