The horror show of America’s residential real estate market just keeps getting scarier, what with the sub-prime mortgage crisis threatening to slash demand for homes while the inventory of unsold properties continues to pile up. It’s enough to send any prudent investor fleeing to the relative sanity of, say, the stock market.
Don’t. Instead, get ready for the bounce-back. The oldest rule of investing dictates that you buy low and sell high. Real-estate buyers aren’t at the gate, however, because most local markets have yet to hit bottom. In fact, most cities won’t do so for another year.
But Business 2.0, working with Moody’s Economy.com, has unearthed 10 major metropolitan areas that are bucking the national housing trend. By the beginning of next year, these markets should be coming back to life — and in our exclusive rankings, we’ve projected the house-price appreciation these cities will enjoy during 2008 and 2009. The gains may seem modest — they range from about 4 to 7 percent — but remember, in the midst of the current housing meltdown, any gain at all constitutes a minor miracle.
What our 10 cities have in common is that they’re relatively affordable. They missed out on the housing bubble, yet they still enjoy steady employment and income growth. Not surprisingly, five of the 10 are state capitals with hefty public payrolls. Even more telling, with the exception of the three Texas metros ( Austin, Dallas, and Houston), the big national builders didn’t make significant incursions into these markets.
“These cities didn’t draw in speculators or investment the way the coastal markets did,. says Celia Chen, the Economy.com economist who crunched our numbers.” “House prices in these places weren’t untethered from the underlying fundamentals.” These underappreciated — but soon-to appreciate — housing markets offer real opportunities to the savvy investor.
Dallas- Fort Worth
Projected median sales prices for single-family homes:
Q1 2008: $151,930
Q4 2009: $161,690
Growth rate: 6.4 percent
The Metroplex, as locals call the Dallas- Fort Worth region, is smoking, adding jobs at twice the national rate. Better yet, those new jobs are concentrated in well-paying fields like banking, advertising, and health care. Dallas- Fort Worth sits at the center of the Interstate 35 corridor, a “megapolitan” galaxy of urban development that Virginia Tech researchers estimate will add 6.4 million new people and 2.8 million units of housing over the next two decades. Dallas also serves as the North American headquarters for international high-tech employers like Nokia and Ericsson. All of this makes Dallas one of the nation’s nine most global metros — cities that are hubs for international trade and foreign investment — according to an analysis by Moody’s Economy.com.
Dallas has largely avoided the boom-and-bust cycle, which is one reason this market is on track to post the best returns on housing of any major U.S. city during the next two years. An added bonus: The region’s service sector has escaped the collateral damage that comes when the bubble bursts and equity-driven spending dries up.
Indianapolis
Projected median sales prices for single-family homes:
Q1 2008: $122,940
Q4 2009: $130,630
Growth rate: 6.3 percent
Indianapolis is riding a few trends that are bringing about an early recovery in its real estate market. While Indiana’s capital city did join in the housing boom this decade, prices didn’t reach the stratosphere. Indianapolis still suffered through the downturn, though: Building permits for new homes dropped 30 percent from their peak in 2005. But the housing market hit bottom earlier here than in most parts of the country — during the last quarter of 2006. Now, with the local economy poised to grow faster than the national average over the next two years, house prices are projected to post a respectable gain.
Indianapolis’s low unemployment rate has made it a destination for people fleeing cities like Fort Wayne, Gary, and Terre Haute. It’s also relatively cushioned from slowdowns in the national economy because more than a third of its workforce is employed in stable sectors like professional and business services, health care, education, and government. Those white-collar corps also helps boost Indianapolis’s median household income to $50,500 a year. Given that you can buy a four-bedroom, 2,000-square-foot home for less than $200,000, this makes the place the nation’s most affordable major metro.
New Orleans
Projected median sales prices for single-family homes:
Q1 2008: $153,850
Q4 2009: $162,600
Growth rate: 5.7 percent
Two years after Hurricane Katrina, New Orleans is a special case. Half of the city’s schools remain closed, and 60 percent of its hospitals are shut down. The storm displaced more than a third of the city’s population and destroyed or damaged 200,000 units of housing. A rush to buy anything left standing created a short-lived housing bubble last year, but prices have fallen back to pre-Katrina levels. What remains is a shortage of workers — the unemployment rate has dropped from double digits to right around the national average — and a lack of affordable housing. That’s put extreme pressure on the rental market, with rents jumping nearly 40 percent in 2006, according to the nonprofit Greater New Orleans Community Data Center.
Those topsy-turvy trends make New Orleans the most difficult market on our list to predict. It’s actually split into two halves: intact homes vs. those damaged by the flood. The latter represent the bottom half of the housing market, yet that’s where the upside lies during the next two years. Local speculators bought up thousands of homes that were selling in the $150,000 range before Katrina for as little as $70,000 immediately after the hurricane. They’ve been renovating them with bells and whistles like marble countertops and listing the properties for about $200,000, says Arthur Sterbcow, president of Latter & Blum, the largest real estate brokerage on the Gulf Coast.
The locals got in early, but there will be a second opportunity for others to buy distressed properties at a deep discount. Latter & Blum estimates that New Orleans will witness more than 20,000 foreclosures during the next 24 months.
Atlanta
Projected median sales prices for single-family homes:
Q1 2008: $177,750
Q4 2009: $187,640
Growth: 5.6 percent
Half a million dollars probably won’t buy you a home in one of Atlanta’s Martha Stewart-style neighborhoods. And that’s a good thing, argues Dan Forsman, CEO of Prudential Atlanta. Forsman says the smart money here will move upmarket, in exactly the opposite direction of where it will go in New Orleans. A contrarian by nature, he sees the biggest arbitrage in properties priced at $750,000 in high-end communities northeast of the city — suburbs like Druid Hills, Duluth, Johns Creek, and Suwanee. The construction cost of a home in those pockets is $260 a square foot; right now, you can pick one off for $180.
Boding well for the local economy, “Hotlanta” boasts one of the highest rates of job growth in so-called creative-class occupations in the country. Why? It’s the top destination in America for young professionals, a transportation hub ( Atlanta’s airport is the busiest in the world), and a place where most Fortune 500 companies maintain a regional presence. Projections by researchers at the U.S. Census Bureau and Virginia Tech place Atlanta at the center of a “megapolitan” cluster of urban sprawl that will develop over the next quarter-century, encompassing 7 million people.
This points to another niche real estate play: As buildable land around the city disappears, downtown neighborhoods on the brink of transformation are ripe for investment.
Montgomery
Projected median sales prices for single-family homes:
Q1 2008: $140,020
Q4 2009: $147,690
Growth rate: 5.5 percent
While layoffs from domestic carmakers depress the economies of northern Rust Belt cities, South Korean car company Kia is injecting jobs into Alabama’s Interstate 85 corridor. The new jobs will boost the local economy and light a fire under housing prices. With the city’s buildable land filling up, prices will spike.
Earl Martin, general manager of Aronov Realty, says prices will rise the most in new subdivisions on Montgomery’s east side, as well as in the small towns along I-85. Other hot spots are bedroom communities like Wetumpka, 15 miles to the north in the so-called river region.
The other pocket seeing a resurgence is Old Cloverdale, a historic neighborhood in the heart of Montgomery where F. Scott Fitzgerald lived during the jazz age. Call it a trickle-down tax effect. After a decade of stagnation, the state government has been on a hiring spree for two years. The oversize public payroll is well represented in Montgomery’s center, where about 9,000 state employees work alongside the staffs of 100 different trade associations and lobbying firms.
Memphis
Projected median sales prices for single-family homes:
Q1 2008: $143,550
Q4 2009: $150,730
Growth rate: 5.0 percent
Graceland aside, Memphis doesn’t have many signature landmarks pumping up its property values. In fact, the city has been getting a bad rap because some real estate pros consider it one of the country’s foreclosure capitals. But Memphis’s housing market should hit bottom within the next few months, and the average home bought in 2003 still managed to sell for 12 percent more last year. Even better, prices have held steady this year, although the average number of days that homes sit on the market has grown larger. The PMI Risk Index, an econometric model developed by PMI Mortgage Insurance that predicts declines in home prices, consistently ranks Memphis as one of the nation’s least vulnerable markets. And a survey by the forecasting firm Global Insight and National City Corp. has listed Memphis as one of the most undervalued markets in the United States for several years because of the low cost of housing relative to household income.
You can find some good values near Beale Street, the birthplace of America’s blues scene, where a downtown condo-building craze has stranded a swath of empty units on the multiple listing service. But the best investment is one that taps into the collateral damage of the credit crunch. More couples and families will fail to qualify for mortgages and resort to renting single-family homes instead of buying them.
Mobile
Projected median sales prices for single-family homes:
Q1 2008: $134,580
Q4 2009: $140,920
Growth rate: 4.7 percent
A low-wage backwater at the beginning of the decade, Mobile is emerging as the South’s next boomtown and a magnet for megaprojects. The biggest is a $3.7 billion steel mill that German industrial giant ThyssenKrupp is building north of Mobile. It will create 2,700 jobs when it opens in 2010, generate almost twice as many spinoff jobs, and bring in 30,000 workers during the construction phase. Next up is a new container terminal that will catapult Mobile into the big leagues as a shipping port. At the top of the food chain, aerospace contractor Eads just opened a facility on Mobile Bay where 150 high-earning engineers will design Airbus’s long-range jets.
Just how great is that for the housing market? Mobile has seen scant home construction during the past two decades, and a housing shortage means the real estate market is set to heat up. Already, a three-bedroom, 2,000-square-foot home that sold for $157,000 a year ago now goes for about $170,000. The trend has captured the notice of speculators from California, Colorado, and Florida.
Austin
Projected median sales prices for single-family homes:
Q1 2008: $186,350
Q4 2009: $195,060
Growth rate: 4.7 percent
In Austin, the rental market takes a backseat to buyers, many of whom hold high-paying jobs with tech giants like Dell, IBM, and Freescale Semiconductors. Austin’s population is well educated — 40 percent have a university degree — and the Texas capital ranks among the top major metropolitan areas for business startups per capita. Austin also has the highest percent age of residents in the coveted 25- to 34-year-old demographic and, not coincidentally, the highest concentration of live music venues in the country. The labor market is so hot that shortages of engineers and product managers are driving double-digit wage hikes in those occupations.
But unlike other creative-class capitals, Austin doesn’t price white-collar talent out of the housing market. At $200,000, the median sales price for a single-family home is about a third of that in San Francisco. But the gap is starting to close: While home prices in San Francisco have barely budged since the market peaked in 2005, prices in Austin have risen by 6 percent. That has prompted major builders to lay groundwork for some of the largest new master-planned communities in the country – at the very time that competitors are fleeing other Sun Belt metros.
Houston
Projected median sales prices for single-family homes:
Q1 2008: $154,850
Q4 2009: $161,910
Growth rate: 4.6 percent
Downtown Houston is also one of the places to be these days. The Texas oil capital is notorious for its suburban sprawl and horrendous traffic jams, but within the so-called Inner Loop bounded by Interstate 610 lies a new land of opportunity. That’s where a multibillion-dollar expansion of Houston’s medical center has spurred an influx of high-earning workers looking to live nearby.
Commuting to the center of the city has gotten worse in recent years, so suburbanites are flocking to the Inner Loop to snatch up older homes just for their lots and location. The trend is none too surprising, given that Houston is the only major U.S. city with no formal zoning code, which makes purchasing older houses and tearing them down to build whatever you want pretty easy. New homes on old lots start at about $1 million and reach as high as $4 million. Meanwhile, Big Oil is keeping Houston humming; the city added nearly 100,000 jobs last year.
St. Louis
Projected median sales prices for single-family homes:
Q1 2008: $143,920
Q4 2009: $149,710
Growth rate: 4.0 percent
St. Louis’s annual per capita income of $36,000 matches the national average, and the metro’s economic growth rate closely tracks that of the overall U.S. gross domestic product. Its workforce is light on the kind of high-skilled techies that have made places like Silicon Valley and Raleigh-Durham boom – but then again, the middle of the road is a good place to be during a national housing meltdown. The boom-and-bust fluctuations in hot markets were only felt as ripples here.
Craig Heller, a local developer who owns a company called Loftworks has placed his bets on converting historic buildings and warehouses in the urban core into condos, selling the units at an average of $275,000 a pop. He expects downtown loft prices to increase substantially this decade, thanks to reverse migration from the suburbs.
At the same time, a different brand of gentrification is starting to emerge in outlying towns that have been absorbed by St. Louis’s sprawl. Speculators are buying traditional country homes at a discount in enclaves like Glendale, Kirkwood, Sunset Hills, and Webster Groves. They then tear them down and put up McMansions that list for multiples of the property’s original sales price.
Source: CNNMoney.com