How to find hidden gems in smaller markets

I am starting a newsletter series on how to find hidden gems in smaller markets. Of the many indicators, I found that demographics such as population growth is the most reliable; once the trend began, it continues in the same direction for a very long time. Japan has had 30 years of economic decline due to an aging population, and we are witnessing Korea and China heading on the same trajectory.

Recently I watched an interview with legendary investor and my mentor Jonathan Twombly. Jonathan told the history of urbanization in Northeastern US and now the South, and I highly recommend it (click here to watch).

Jonathan shared 3 reasons why he is bullish in the residential space:


• The lack of starter homes… Just as millennials reach the prime age (30s) to be homeowners, there is lack of starter homes. Average new built homes are 2,500 sf compared to 1,400sf back in the 1980s. 40% of new homes were starter homes compared to 7% in 2019. • Because of the high cost of land… Areas with commutable distance are getting built out as the population continues to grow. Demand is driving up the cost of land. Builders build larger homes to increase the margins. • Driven by NIMBY-ism (“Not in my Back-Yard”) People don’t want their neighborhood to change; residents resist up-zoning with a passion. They want suburbs to stay suburbs and impose strict zoning restrictions. People don’t want anything builds near them.

Adding to the supply constraints, wealthy boomers are also downsizing into starter homes and beating out millennials and other boomers, who are not selling now because they are afraid they can’t find a replacement.

You might ask what does this mean to you as an investor? Jonathan said, “…this is a long term trend that as long as you don’t grossly overpay or make the mistake of buying something that is going to cost you to hold….don't do that. If you have the long view you don’t need something for immediate cash flow. As long as you buy an asset for a price that is cover the cost.. just natural process to play itself out.

The best part is you don’t have to chase the hottest markets in the South. Follow the population and you might find there are submarkets near you that are growing as well. I recently researched 9 submarkets in Washington State and Idaho (excluding Seattle and Boise), and I found almost all markets have population growth faster than the US (0.5%). On average these submarkets grow at 1.27% or 2x faster than the US for the last 10 years; in the next 5 years, these markets are forecasted to grow 2x faster than the US per Costar research. Investors will do very well while there is less competition from institutional investors compared to buying in Phoenix or Dallas. As a demo, I’ll continue to write about these smaller markets in the future newsletter. Let me know if there are interesting markets near you as well and you can follow along using the same process. Have a good weekend!

Markets

​10Y Pop Growth (US 0.6%)

5Y Pop Forecast

Bellingham, WA

1.20%

1.10%

Mount Vernon, WA

1.10%

1.00%

Wenatchee, WA

0.90%

0.80%

Tri Cities WA

1.50%

1.30%

Spokane, WA

1.30%

0.90%

Olympia, WA

1.50%

1.40%

Coeur d' Alene, ID

2.30%

1.80%

Walla Walla, WA

0.40%

0.10%

Bremerton, WA

0.80%

0.70%


- Henry

Sharpe Investor Group Portfolio Update

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Henry Yuen - henry@sharpeinvestorgroup.com



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