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Behind Blue Lines

Arie van Gemeren, CFA
Arie van Gemeren, CFA |
Behind Blue Lines
10:33

There’s a popular narrative in real estate circles that the Sunbelt—broadly synonymous with “red state” America—is where the action is.

Lower taxes. Pro-business climates. Faster growth. Fewer restrictions. And for investors? A promise of higher returns.

Much of that is true. The fundamentals—migration trends, job growth, construction velocity—are real. But one of the hard lessons of investing is this: good stories don’t always translate into good returns.

Just because a city is growing doesn’t mean real estate prices will soar forever. Just because a place is “business-friendly” doesn’t mean it’s investor-friendly when cycles shift. A great narrative can become untethered from valuations—and when it does, volatility follows.

There’s a quieter, often overlooked counter-narrative that deserves more attention.

When you zoom out and study the data over the past 20+ years, it’s the “blue state” markets—places like Seattle, San Francisco, Los Angeles, and New York—that have delivered something different: resilience. Less volatility. Steadier appreciation. A longer arc of wealth preservation.

This isn’t about politics. It’s about the actual mechanics that drive real estate performance—and how to think clearly about risk, reward, and the kind of returns that compound over decades.

Let’s break it down.

I. The Hidden Variable: Supply Elasticity

Everyone talks about demand. Far fewer think seriously about supply.

But over the last 25 years, the biggest difference between red and blue state markets has been how supply responds to demand.

In cities like Seattle and San Francisco, supply is boxed in—literally. Geography and zoning policy work together to choke off new construction. Seattle is hemmed in by water. San Francisco is a 7x7 peninsula. Portland has a legally enforced urban growth boundary. These are markets where you simply can’t build fast enough to meet rising demand.

Compare that with Houston or Phoenix. These cities sit on open land with relatively light regulation. When demand rises, supply comes flooding in. Fast.

That’s good for affordability but bad for investors seeking durable pricing power. Supply elasticity acts like a shock absorber. It tempers booms, but it also exacerbates busts.

Data from 2024 shows red states issued roughly 4.66 housing permits per 1,000 residents, compared to 3.60 per 1,000in blue states. That's not a minor gap. That’s structural.

Housing Permits Image

I cannot belabor this point enough. Red States are much better at producing housing. That’s good in some ways, but it’s bad for the narrative of being an asset owner. Remember, the value of something goes up because it is more scarce. Red states are better at making houses and buildings less scarce. They also overproduce on the “up-trend” part of the cycle, which creates a rollercoaster effect.

 

 

Here’s another impactful chart to pay attention to. It demonstrates the problem, perfectly. Cities like Portland, OR are geography constrained, but they are also policy constrained. In 2017 Portland passed a rule that required buildings larger than 19-units to include some percentage of affordability. Look at the result.

You can see that when the law passed, there was a huge spike in permits. Then larger building permits rapidly shrank back down to almost immediate post-recession figures and 19-unit or smaller permits continued to shoot up. Why? Because 19 units or less don’t have this policy constraint.

But what this also means is that already scarce land is being developed into inefficient-sized buildings per code because of policy manipulation. In short, supply inelasticity.

Portland Permits

II. Appreciation Without the Rollercoaster

Now, let’s look at price appreciation since 2000. Blue state cities have delivered significant long-term gains without the whiplash.

  • Seattle: up nearly 4x

  • San Francisco: ~2.5–3x

  • Los Angeles: ~2.5x

  • New York City: ~2x, steady but stable

These markets weren’t immune to 2008 but fell less and recovered faster. Contrast that with Phoenix, which doubled in value from 2000 to 2006, then crashed -56% in the Great Recession. It took a decade just to claw back losses.

Home Price Index

Boom-bust markets offer quick upside—but they require near-perfect timing. Supply-constrained markets offer something different: compounding. Over time, that’s what builds wealth.

Please keep that in mind. Yes, Arizona and other Red States offer huge prospective returns in short periods—but you have to time it! Good luck!

III. Rent Growth and Volatility: Blue Markets Offer Predictability

The past two decades have revealed something critical about rent dynamics in different regions: rents tend to rise with relative steadiness in blue markets like Seattle. Red-state boomtowns like Phoenix and Tucson move more like a stock chart—big spikes, deep pullbacks, and unpredictable turns.

Let’s take a step back.

From 2000 to 2019, Seattle’s rents grew in a remarkably stable pattern. The average rent doubled over that period, rising from around $800 to $1,600. There were no major drops, no chaos. It is just a city with a growing job base, constrained supply, and healthy demand, pushing rents upward like clockwork.

Phoenix and Tucson looked different. Rents started far lower—$600–$750 range in 2000—and rose modestly through the early 2000s. But when the housing bubble burst in 2008, Phoenix rents slipped. Not catastrophic, but enough to prove a point: even the rental side of a “growth market” isn’t immune to volatility.

Fast forward to the pandemic.

Arizona’s rent markets exploded. Phoenix posted a year-over-year rent gain of nearly 27% in 2021. Tucson wasn’t far behind. Sunbelt migration, remote work trends, and undersupplied inventory triggered a frenzy. Rents surged 30–35% above pre-pandemic levels in a flash. But then? The music stopped.

By 2023, Phoenix rents were down 2–3% year over year, and Tucson flatlined. Developers had rushed in to meet the demand, and when demand normalized, the oversupply began to weigh on pricing.

Seattle’s rent path was more nuanced. It did take a hit early in the pandemic—rents fell over 20% in 2020 as remote work emptied out the city. But then they recovered quickly. From early 2021 to mid-2022, rents jumped over 50%, recouping the loss and catching back up with the long-term trend. And when the market cooled in 2023, Seattle saw a modest correction—rents dipped by 10–16% from the peak—but by early 2025 they were already rising again, up nearly 2% year-over-year, even as national rents declined slightly.

Here’s the core insight: Seattle’s long-term rent curve looks like a steady climb, despite a couple of bumps. Phoenix’s looks like a heart monitor. Huge highs, followed by flatlines or dips. It’s not just about growth—it’s about reliable growth.

For investors, that matters. Predictable rent appreciation compounds. It smooths out the ride. You don’t need to perfectly time the market or guess when the next wave of migration will hit. You’re not hostage to the cycle.

That’s the kind of foundation you can build long-term strategies on.

IV. Downturn Defense: How Markets Behave in Crisis

Real estate is a cyclical business. Everyone’s a genius in a bull market. What matters is how your market behaves when things break.

In 2008, Phoenix dropped -56%. Las Vegas fell -64%. Florida markets were decimated.

Meanwhile:

  • San Francisco: ~-25%

  • Seattle: ~-22%

  • New York: ~-20%

  • Houston: ~-8%

Downturn Protection

Two things to note on the above. First off - go Houston. It contradicts my argument - but I’ll let it stay here.

Houston is the exception that proves the rule. Its long-term performance has been strong not because of wild appreciation but because of economic durability, energy-sector resilience, and sound lending frameworks. Unlike other red-state boomtowns, Houston avoided speculative extremes, giving it a surprisingly stable profile over two decades—even if its returns have been more modest.

Separately - the 2022 “Correction” in housing prices is, in my opinion, not indicative of a normal crash. The “2022” period was driven by COVID-19 and local government policies being quite restrictive in those markets and residents' move-outs.

The 2008 crash is, in my opinion, more indicative of the performance of these markets in an economic downturn, not a viral-induced policy one. If you are able to predict the next great viral related downturn - good on you. I’d put my money on a standard economic downturn first, though.

V. Geography, Institutions, and Economic Gravity

So, what makes these markets so stable?

It’s not just zoning. It’s gravity.

  • Seattle has Amazon, Microsoft, and UW.

  • San Francisco has Google, Meta, UCSF, and Stanford.

  • NYC has Wall Street, Columbia, NYU, and a global talent magnet.

  • LA has Hollywood, aerospace, and multiple major universities.

These cities generate stickiness. People want to live there, but more importantly, they want to work there. Talent flows to the top. When jobs are plentiful, so is rental demand. Even when people gripe about taxes or regulations, they stay.

I will also say - venturing into opinion - that they have substantially better climates than many of the comparable red-state locations. As a certified “disliker” of Arizona, I cannot understand why somebody would want to live in 115-degree weather.

But that’s just me.

VI. What Kind of Return Do You Actually Want?

Over the last five years, there’s been a mass migration of capital—and people—into red state metros. Sunbelt cities look better on a spreadsheet. They cash flow better. The regulations are looser.

But the ease of doing business isn’t the same as the quality of the return.

I like blue state markets for what they are:

  • Long-term plays built on structural scarcity

  • High-barrier ecosystems that preserve value

  • Economies that are hard to replicate and slow to decay

They won’t triple in two years. But they hold their value. They compound quietly. And when the cycle turns—and it always does—they’re still standing.

Conclusion

There’s no perfect market. Every deal lives and dies on its own fundamentals.

But if someone tells you red states are where the returns are—ask: what kind of return are you really chasing?

Because if you're after appreciation with less drama, rents that grow on rhythm, and markets that protect you when the storm hits, you might just find what you’re looking for…

Behind blue lines.

Sources:

 

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