On today’s show we’re talking about home buyer sentiment. The folks at Fannie Mae have some of the best research in the country and last week they published their The Home Purchase Sentiment Index® (HPSI). It is a composite index designed to track consumers’ housing-related attitudes, intentions, and perceptions, using the net results of six questions from the National Housing Survey® (NHS).

The index increased 2.7 points in November to 91.5, reversing the decline from last month and re-approaching the survey high set in August. Three of the six HPSI components increased month over month, including large increases in the percentage of Americans who believe it’s a good time to buy and that home prices will go up over the next 12 months.

The data guessed correctly that the Federal reserve would not change rates and that’s exactly what they did. The Fed also signalled that rates would remain steady for some time to come.

The analysis of the data mirrors what I’m seeing first hand in several markets. We are seeing price increases at the entry level in the market. The lower interest rates are creating conditions that enable first time buyers to bid up the price at the entry level. There is an acute shortage of housing at the entry level and many first time buyers fear being frozen out of the market.

This is creating frothy conditions at the affordable end of the market, even if prices at the top of the market are flat and in some cases slightly down.

So what does this mean for real estate investors?

It means that we can expect some movement out of rentals into starter homes for first time buyers. Those leaving rental accommodations will be primarily millennials who are getting married, having children, or otherwise looking to buy a first home.

We are seeing high variability in labor costs from market to market depending on the supply demand balance of construction labor. This translates directly into construction cost. Even a few percentage points difference in construction cost can affect the price of starter homes and the financial viability of new development projects.

The result is that more and more developers are building smaller homes in order to maintain affordability, and they are focusing more on density. This means more townhouses, more stacked townhouses, and more condos.

In higher priced markets, a starter home is not a detached home, but a condo.

The populations of both the US and Canada are growing. We expect about 0.9% population growth in the US this coming year and about 1.6% in Canada. That translates into demand from an additional 2.9M people in the US and about 438,000 in Canada.

New construction in the US is expected to maintain an annual rate of about 1.32M units. That’s barely enough to keep pace with the population growth. When developers In areas that have excess demand, we can clearly expect prices to rise.

Areas that are losing population, like the traditional rust belt addresses can expect prices to remain flat or increase modestly.

Sunbelt addresses where population growth, combined with migration inside the country are seeing very strong demand, in excess of supply. These are the market conditions that I find interesting as a real estate investor.

The same short list of markets keep coming up. This includes Nashville, Atlanta, Dallas, Houston, Charlotte, Raleigh Durham, Austin, Orlando, to name just a few.

If you can find opportunities to acquire development land in the path of progress in any of these markets, you can often create a tremendous amount of value.

Remember, it’s population growth that drives demand, and jobs that drive the ability to pay.