Before 2020, if you asked most people around the country what they thought about Idaho, the response was probably something like, “You mean the place people go to hide from the government?”
Now, in the wake of the massive influx of new people over the last three years, it can feel like the secret is out about our state. But we believe this is only the beginning stage of Idaho’s development – read on to see why we believe Idaho is the best place in the country to be building a real estate portfolio over the next 100 years.
Before getting into our thesis about Idaho, it’s important to consider what makes a good real estate investment thesis in general.
You can categorize the fundamental influences on the real estate market in two broad buckets: economic and regulatory. The latter includes all of the ways governments incentivize or penalize real estate ownership. This usually boils down to property rights and tax laws – i.e., what I can do with my property and how much I owe the government for those rights. However, with the rise in government intervention in the economy over the past few decades, interest rates would also fit in this category. Regulatory impacts on real estate are fickle and can change with the political season, which makes them impossible to predict over an extended period of time. That said, our stable regulatory environment is arguably the main reason the United States has outperformed every other real estate market in the world – we have a long history of strong property rights and tax incentives relative to other countries.
The economic influence is simpler in theory (while more complicated in the real world). Economic growth is a combination of people & productivity. If you have a growing population that is becoming more productive, you’re set. With a shrinking population that is becoming less productive, you’re doomed. And even if you have a shrinking population that is growing in productivity (or vice versa), you can do well.
In this context, a macro-level thesis for real estate investment needs to answer two questions:
This would be a continuing trend, not a new occurrence – since 1997, Idaho ranks 3rd in the country in real GDP growth, outpacing states like Texas, California, Florida, and Washington (data from the Bureau of Economic Analysis). And more recently, Idaho has been the subject of national headlines for its boom in migration (US News: Idaho is the best state for economic growth). While it seems unlikely that Idaho could maintain its rate of growth during the Covid migration (2020-2021), we believe that Idaho will continue to grow at the pace of the last few decades, which is an average of just under 3% per year (US Census Data). This doesn’t sound like a lot, but for context, our national population growth in the United States hasn’t topped 1% in a year in the past two decades and has been steadily slowing since then (in fact, we had the least annual growth since our nation’s founding in 2021).
Why do we expect this trend of steady growth to continue? As you learn in Finance 101, past returns do not guarantee future results. The simple answer is that Idaho is a more desirable place to live and raise families than many other options out there. We offer a distinctive set of attributes that appeal to many people:
Each of these items can be found individually in other places, but the combination in Idaho creates a distinctive, attractive product that we believe will continue to draw people for many years to come.
While population growth is arguably the most important, it’s also worth commenting on productivity (the second factor in the economic growth equation). There is an “empirical” approach to measuring productivity that calculates things like GDP per hours worked, GDP per capita, unemployment, job growth, etc. Depending on which metric you look at, Idaho may look great or terrible – the results are mixed.
But this approach doesn’t capture the full picture: what leads to economic growth is a productive culture. Are people building and planting seeds for future generations? Are they working hard to provide for their families? Are they taking risks to start companies, develop new technologies, and solve problems across different industries? This is the type of productivity that can’t be measured empirically, but that leads to long-term economic growth. This was the working culture of states like Texas and California that helped them surpass older economic powerhouses like New York and Illinois over the second half of the 20th century. And we believe this is the type of culture that Idaho is developing and that will amplify the economic growth in coming years.
Finally, economic growth isn’t the only important factor for real estate investment. There are financial tailwinds (anyone heard of inflation and interest rates these days?) and regulatory risks that one must consider. Regarding the former, we believe the best way to protect oneself in the face of an uncertain financial future is to own income-generating assets without too much leverage. The financial tailwinds that impact real estate, however, are national rather than regional, so not of much concern here.
The regulatory risks, on the other hand, ought to be top of mind for anyone investing in real estate. Many states have been attacking property rights over the last few decades – a trend that accelerated with Covid policies enacted in 2020. Three of the most hostile states toward property owners sit on the West coast: California, Oregon, and Washington. While Idaho’s regulatory environment is not the best in the nation, it is stable and landlord friendly (similar to most conservative states in the midwest and south). Unless we undergo a major political & cultural shift, those policies should remain steady in the future.
It’s important to keep in mind that our thesis around these factors – Idaho’s desirability, productivity, and regulatory environment – is in the context of comparison to other states. We believe there are a lot of things that could make Idaho more desirable, more productive, and better governed (and Lord willing, we will see some of those changes enacted). But compared to other states across the country, Idaho is promising. And if you limit the comparison to just our West coast neighbors, Idaho is looking better and better every day.
This relative comparison also works in the opposite direction. If the pessimists are right and our country is headed for economic stagnation or decline, it’s unlikely that Idaho could operate on an island and continue to grow. But given the factors mentioned above, we believe Idaho will be the caboose getting dragged along by national economic issues rather than the engine pulling it down the slope.
It’s worth mentioning a few other factors that support our thesis, but don’t necessarily fit in as premises:
This is a valid objection to our thesis: much of what we like about Idaho is true of other states that have seen massive inbound migration over the last few years (with steady growth for decades). Further, states like Florida and Texas have the appeal of being the current capitals of conservative America, attracting businesses and people who want to be part of that culture. Why not one of these more influential states?
As much as we think those are great places to invest, we believe Idaho has an edge in the following areas:
To summarize, we believe Idaho will lead the country in economic growth over the coming decades, which will be a strong macroeconomic tailwind to support investment success at the micro-level. There will surely be ebbs and flows in the market over the years, but when you’re looking at multiple generations down the road, it’s a thesis we believe is worth building a portfolio around.