What Is an 18-Hour City?

Economists and real estate investors use the term 18-hour city to describe a mid-size city with attractive amenities, higher-than-average population growth, and a lower cost of living and cost of doing business than the biggest urban areas. The 18-hour city generally has a population of under one million, making it a second-tier city.

Eighteen-hour cities in the U.S. are increasingly seen as viable alternatives for investment and living to the Big Six markets of Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C that make up America’s first-tier or 24-hour cities.

Understanding the 18-Hour City

While loosely defined, the term 18-hour city most often refers to a city that has public services, amenities and job opportunities that are comparable in quality to those in the big six markets.

Unlike the biggest cities, most of their services and amenities don’t operate on a 24-hour basis. However, they boast comparable advantages, including solid public transportation systems, modern infrastructure and strong economies. Housing prices are moderate in comparison.

The 18-Hour City Advantage

Eighteen-hour cities have emerged as an attractive alternative to big cities for starting a new business, relocating an existing one, or investing in real estate. They typically feature lower capitalization rate compression, meaning property values tend to remain stable rather than spiking up or down significantly.

Like first-tier cities, 18-hour cities often boast low real estate vacancy rates along with favorable supply concentrations, rental growth and absorption trends—all indicators of long-term real estate investment potential.

Aside from the numbers, Forbes.com cites a distinctive and lovable culture as a key factor in creating and maintaining a vibrant 18-hour city: “Austin is the live music capital of the world. Denver and the Research Triangle are outdoor meccas. Portland is just plain weird (and residents would like to keep it that way.”

One perceived downside is the increased risk inherent in cities that do not have the established track record of primary market cities.

Examples of 18-Hour Cities in the U.S.

CrowdStreet, a site for crowd-sourced real estate investments, cites Austin, Denver, and Nashville as recent stars among 18-hour cities. In 2020, it identified Charleston, South Carolina, as the next big success story in the category.

Realtor.com identified its top metropolitan areas for 2020 and beyond, with all of its top five picks squarely in the 18-hour city category. They include Boise, Idaho; Mc-Allen-Edinburg-Mission, Texas; Tucson, Arizona; Chattanooga, Tennessee, and Columbia, South Carolina.

The National Real Estate Investor website chose Charleston, Kansas City, and Columbus, Ohio, based on their stellar growth in jobs.

Follow the Millennials

These and other frequently-cited 18-hour city stars have become targets for millennials whose goal is launching or advancing their careers. They are characterized by the availability of recreation and entertainment opportunities that extend well beyond what the typical second-tier affords.

Employers are drawn to 18-hour cities because doing business is less expensive in these markets and this, in turn, attracts large numbers of job seekers and entrepreneurs.

What Is an Appraisal Management Company (AMC)?

An Appraisal Management Company (AMC) is an independent entity through which mortgage lenders order residential real estate valuation services for properties on which they are considering extending loans to homebuyers.

AMCs fulfill an administrative function in the appraisal process, including selecting an appraiser and delivering the appraisal report to the lender. Individual appraisers who work for AMCs provide the actual property valuation services.

Understanding Appraisal Management Companies (AMC)

AMCs have been a part of the real estate landscape for the past 50 years. However, their numbers remained limited until the financial crisis of 2007 to 2008.

In 2009, the New York Attorney General, government-sponsored enterprises Freddie Mac and Fannie Mae, and the Federal Housing Finance Agency (FHFA) established the Home Valuation Code of Conduct (HVCC) appraisal guidelines. The HVCC guidelines, no longer on the books, laid the foundation for the appraiser independence found in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Truth in Lending Act. Laws obligating lenders to use independent appraisers led to a sharp rise in the use and number of AMCs.

The HVCC and later federal regulation sought to limit the amount of direct contact that lenders could have with appraisers. Essentially, the U.S. federal government created appraiser independence requirements to prevent lenders from influencing appraisers to inflate property values, a problem believed to have contributed to the housing crisis.

With an AMC, mortgage brokers, loan officers, nor homeowners may select the appraiser for the property on which they want to lend/borrow funds. Since the former parties have a financial interest in the transaction, there is a risk they might attempt to influence the appraiser to assign a higher value to the property than market conditions support so the transaction will go through.

Appraisal Management Company (AMC) Requirements

AMCs maintain a pool of state-licensed or state-qualified appraisers to meet requests from lending institutions. An appraiser is then assigned to provide an appraisal report for the property.

AMC appraisers are not provided with any prior information regarding the property or put in contact with the lending institution. The appraiser’s assessment must meet the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines. If there are any issues, the AMC can legally assist.

What Is Asset Protection?

Asset protection is the adoption of strategies to guard one’s wealth. Asset protection is a component of financial planning intended to protect one’s assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets while operating within the bounds of debtor-creditor law.

Understanding Asset Protection

Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion, or bankruptcy fraud.

Experts advise that effective asset protection begins before a claim or liability occurs since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing, and family limited partnerships (FLP).

If a debtor has few assets, bankruptcy may be considered the more favorable route compared to establishing a plan for asset protection. If significant assets are involved, however, proactive asset protection is typically advised.

Certain assets, such as retirement plans, are exempt from creditors under United States federal bankruptcy and ERISA (the Employee Retirement Income Security Act of 1974) laws. In addition, many states allow exemptions for a specified amount of home equity in a primary residence (homestead) and other personal property such as clothing.

Asset Protection and Real Estate

Jointly-held property under the coverage of tenants by entirety can work as a form of asset protection. Married couples who hold mutual interest in property under tenants by entirety share a claim to a whole piece of property and not subdivisions of it.

The combined ownership of the property means that creditors who have liens and other claims against one spouse cannot attach the property for their debt reclamation efforts. If a creditor has claims against both spouses, the tenants by entirety stipulations would not protect the asset from being pursued by that creditor.

Some attempts at asset protection include putting the property or financial resource in the name of a family member or other trusted associate. For example, an heir might be gifted ownership of real estate or other property while the actual owner continues to reside in the property or make use of it. This could complicate efforts to seize property as actual ownership must be determined. Financial accounts may also be domiciled in offshore banks in order to legally avoid paying taxes against those funds.

What Is Absorption Rate?

Absorption rate most commonly refers to a metric used in the real estate market to evaluate the rate at which available homes are sold in a specific market during a given time period. It is calculated by dividing the number of homes sold in the allotted time period by the total number of available homes. This equation can also be reversed to identify the amount of time it would take for the supply to be sold.

Absorption rate is also a key part of the accounting industry. In this context, absorption rate refers to the way in which businesses calculate their overhead costs.

Understanding Absorption Rate

Absorption rate provides insight into how quickly or slowly houses are selling in the real estate market. Absorption rate does not take into account additional homes that enter the market at various times. While an absorption rate calculation can be projected, it’s most commonly used based on current available data and actual inventory.

A high absorption rate may indicate that the supply of available homes will shrink rapidly. A homeowner is typically able to sell their property faster during periods of high absorption. However, the time period associated with an absorption rate calculation is important to consider.

Traditionally, an absorption rate above 20% signaled a seller’s market in which homes are sold quickly. An absorption rate below 15% is an indicator of a buyer’s market in which homes are not being sold as fast.

Influence in the Real Estate Market

In market conditions with low absorption rates, a real estate agent may be forced to reduce a listing price to entice a sale. Alternatively, the agent can increase the price without sacrificing demand for the home if the market has a high absorption rate. The absorption rate is also important for buyers and sellers to follow as they make decisions on the timing of purchases and sales.

The absorption rate is also a signal for developers to start building new homes, though developers often use long lead times to forecast periods of higher absorption. During market conditions with a high absorption rate, demand may be high enough to warrant the further development of properties. Meanwhile, periods with lower absorption rates indicate a cooling period for construction.

Appraisers use the absorption rate to determine the value of a property. Some procedures require an addendum showing that absorption rates were considered in appraisal calculations. In general, appraisers are responsible for analyzing market conditions and maintaining an awareness of the absorption rates for all types of appraisal values.

Most appraisers include this data metric in the neighborhood section of the appraisal forms. The current valuation of a home would be reduced during periods of decreased absorption rates and increased when absorption rates are high.

Lenders and banking institutions will also consider market conditions when evaluating loan and credit terms. During periods of low absorption, banks may feel tempted to entice clients to borrow money with more favorable loan terms. Alternatively, lenders can be more selective during high absorption periods as they are more likely to have a broader portfolio of prospective borrowers.

Example of the Absorption Rate

Suppose a city has 1,000 homes currently on the market to be sold. If buyers purchase 100 homes per month, the absorption rate is 10% (100 homes sold per month divided by 1,000 homes available for sale). This also indicates that the supply of homes will be exhausted in 10 months (1,000 homes divided by 100 homes sold/month).

Absorption Rate in Accounting

Absorption rate is also used in an entirely different manner in accounting.

In accounting, absorption rate (or the rate of absorption) is the rate at which companies calculate and allocate their overhead expenses. These are the costs associated with providing goods and services to their customers, though these expenses aren’t directly traceable to end products. As such, it’s also often called an overhead absorption rate.

Companies often have to use estimates to determine their overhead costs. That’s because they don’t know what the actual costs are until they come in. In order to determine their overhead, companies divide the total budgeted overhead costs divided by the total budgeted production base. This requires an adjustment at the end of the accounting period to make up for any difference between the predicted and actual costs.

Alternatively, a company may know its actual overhead costs but not know how to trace those costs to final products or services. To overcome this hurdle, companies use estimated cost drivers to guess what non-financial measures cause changes in financial measures.

This can be problematic, especially when companies use very conservative estimates to predict their costs. Doing so may throw off their balance sheets because the actual costs may be higher at the end of the reporting period or if costs fluctuate. However, this practice has the benefit of making sure all costs including estimated amounts and estimated allocations are included when evaluating their products.

The Bottom Line

The absorption rate is a very important metric used in the real estate and accounting.

Realtors use it to determine how many homes are sold in a particular area at any given time. These professionals can also use the rate to determine the kind of market they are facing, whether that’s a buyer’s, seller’s, or a balanced market. This rate is also important for the construction industry, as it indicates when developers should start buying.

Equally important, absorption rate is used in the accounting field—notably for companies to estimate their overhead. Absorption costing entails estimating overhead costs, determining overhead cost drivers, and having products absorb these untraceable costs.