For single-family homes, about three-quarters of recent sales in the Dallas-Fort Worth area fell roughly into a $100 – $150/sf range1. Prices are generally kept in check by competition from new supply, as the Metroplex is surrounded by developable land with plenty of new construction. While prices in these areas do increase, they do so at a moderate pace.
One of the big exceptions to this is the central area, where limited-to-non-existent new supply meets consistently strong demand. This results in elevated pricing in the $200+/sf range and beyond. In the central area, the number of homes is constrained by the near absence of developable land. At the same time, proximity to centers of employment and amenities drive strong buyer demand.
The price-jump areas
In our other articles we have talked about investing in homes for cashflow. One of the other approaches to investing in single family homes is to buy in specific areas that are experiencing rapid price appreciation. In the Dallas context, this means buying in areas where the high-priced zone is expanding. Demand for close-in housing exceeds the supply, causing spillover of that demand into neighboring areas and the expansion of the high-priced zone.
This causes a “jump” in pricing where a neighborhood very quickly goes from “average” to “above average” in pricing. The result is that is common to see renovation of older homes in these transitional neighborhoods as buyers seek modern, updated interiors.
So how do we identify these areas of change?
To do this, we need to establish boundaries between “typical” and “high” home prices on a per square foot basis. Out of the 90,000 sales that occurred in the last 18 months, the upper quartile (top 25%) starts at the $150/sf mark, making this a convenient boundary. Similarly, if we look at natural breaks in the distribution of home prices, these also occur around the $150/sf mark and $200/sf mark.
We took thousands of home sales, put them as dots on a map, and used a spatial analytical technique to fill in the space between those points. The calculation is designed to fill in the map by giving the highest weight to the nearest sales points, and to give the more distant points a lower weight. This is called inverse-distance weighting (IDW)2.
Then we took the first six months of 2018, the first six months of 2019 and compared the two.
Zooming in on several areas reveals places where high prices may be creeping outward. This is noticeable near Love Field, especially southwest of Love Field near the UT Southwestern Medical Complex. It is also noticeable in Northwest Dallas where the high-priced zone may have moved by several blocks westward over the course of a year.
The result is that this analysis gives us the first clue on areas to watch. By looking at sales that have already occurred, we are observing lagging indicators that describe the past. The next step is to use other analytical techniques that describe the future.
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- Based on the inter-quartile range of 90,000 homes sold in the last 18 months.
- We tested with another technique, which fills in the gaps using a regression-based formula called kriging and got similar results.
