The most important single factor in determining whether you invest in any city or in any part of the city is the number of productive jobs in that area, and the wage levels for those jobs.
People pay for homes in direct proportion to how close they are to where they work. People usually buy the largest house that they can qualify for in terms of the mortgage payments, and they buy it as close as they can to where they work, shop and go to school.
Job and Population Pressures
When jobs increase, or wage levels increase, or interest rates go down, housing prices and demand for housing goes up. For example, in a city like Pittsburgh, where wage and population levels have gone down, the prices of homes have been flat for some time.
But in places like San Diego or Los Angeles, where there is an influx of new people, there is upward pressure on home values.
Five Types of Cities to Invest In
Cities can be classified into five types, based on their major sources of employment and income. In deciding what city you want to live, work and invest in, these are important considerations.
1. Industrial Cities
The first kind of city is what is called an industrial city. Industrial cities are located primarily in the northeast and Midwest. They are based on the manufacture and processing of commodities, such as steel, coal and raw materials.
These are cities like Chicago, Detroit, Baltimore and Pittsburgh. When the national economy is strong, these cities do well with jobs and wages, and real estate prices are stable.
2. Commercial Cities
The second type of city is devoted primarily to commerce. This includes seaports, lakeports, river cities and railroad terminals. Cities like Atlanta, Los Angeles, San Diego and Miami are cities centered on commerce and trade. These cities have more stable economies because they are always busy with the transshipment of goods and services.
3. Government Cities
The third type of cities, and one of the best types of city to invest in, is government cities. State capitals and Washington, DC have stable workforces and solid economic bases. Governments seldom decline in their levels of employment or wage levels, so there is a solid economic base in any city centered on government. These cities do not grow rapidly, nor do they decline when the economy slows.
4. Recreation or Resort Cities
The fourth type of city is what is called a recreation or health resort-type of city. These are often retirement or vacation centers.
Many of these places have seasonal economies and are often the first places to be affected by recessions or slow-downs in the national economy.
When the economy is strong, these recreation and vacation resorts and cities have strong economies. Real estate values increase, and sometimes boom. When economic times are poor for any period of time, these places do poorly as well.
A decline in discretionary income, or income available for investments, holidays or vacations, always affects the vacation areas first.
Some of the most common examples of vacation centers are the ski resorts in Colorado or Utah, or the resort facilities and islands in Hawaii. These places have strong economies when the national economy is strong, when the economy turns down, real estate values can turn down dramatically as well.
5. Educational Cities
The fifth type of city that you can invest in, and perhaps one of the best, is a city that is an educational, research or cultural center.
For example, Austin, Texas has the University of Texas and San Jose, California has Berkley and Stanford. These places are often some of the hottest places to invest because they are in many cases the fastest growing cities in the United States. Think of Palo Alto and Silicon Valley during the hi-tech boom of the 90s.
Educational and research-center cities usually have stable, strong economies. They attract new white-collar businesses in the high-tech, legal and services areas that pay well. The influx of people and incomes puts upward pressure on real estate prices.