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The healthiest housing markets? It may surprise you

San Jose, Calif.
DenisTangneyJr | E+ | Getty Images
San Jose, Calif.

Following today's housing recovery is like watching a bunch of sixth grade girls decide which boys are cool and which aren't. Boy to boy, housing market to housing market, the winners and losers are constantly changing. Had one predicted just a year ago that five of the 10 healthiest housing markets would be in California, one might have been summarily dismissed.

But Zillow has found that the nation's healthiest housing market is San Jose, followed by San Francisco, Los Angeles and San Diego, and just making it at No. 10, Sacramento.

"Rapid home value appreciation in the West, particularly California, is currently having a very positive effect on a number of other factors, including negative equity, foreclosure activity and the overall financial health of local homeowners. But that same rapid appreciation may cause affordability issues in the future in these markets, leading to potentially unhealthy conditions," Zillow Chief Economist Stan Humphries said.

Rounding out Zillow's top 10 were Denver, Boston, Pittsburgh, Portland, Ore., and New York City, ranking five through nine.

Phoenix and Las Vegas could make the top of another list—the unhealthiest. Both saw rapid price appreciation due to high investor demand. For the past three years, single and institutional investors swooped into these highly distressed markets and began inhaling properties. The intention was to put most of them up for rent. Prices had fallen by well over half in both areas peak to trough, so the bargains were plentiful. Until they weren't.

(Read more: More borrowers will struggle to pay off home equity loans)

In Phoenix, the median single-family home price shot up 71 percent between October 2011 and October 2013, up 27 percent in just the last year, according to Mike Orr, director of the Center for Real Estate Theory at Arizona State University. Investors pushed prices up so far, so fast, that they priced themselves out of the market.

"I anticipate sales will be way down in November and through the holidays, when some people even take their homes off the market until late January," said Orr. "We also anticipate a much slower rate of price appreciation in 2014 than the furious pace we have witnessed over the last two years."

Others have more dire predictions.

"If I was a Phoenix real estate 'investor' sitting on the upside—or in the long process of readying dozens, hundreds, or thousands of houses for rent into a market about to get pounded for years with single-family rental supply—I would push the 'sell button' on everything I could, immediately, on data such as these," said California-based housing analyst Mark Hanson. "In fact, by the looks of the November supply and demand metrics, it's already happening."

Inventories of homes for sale in Phoenix are up 40 percent from a year ago. Some of it may be investors, and some may be regular home owners who have finally come into a positive equity position and can move.

(Read more: The days of 3.5% 30-year fixed mortgages are over)

What happened in Phoenix and Las Vegas is a testament to how impossible this housing recovery is to predict. The usual rules don't apply. Prices usually lag sales, but in this case, prices nearly leapfrogged sales. Housing analyst Ivy Zelman said as much, as she revised her earlier projections for the home building market way down in a report to clients Friday.

"In many ways, the current recovery is unique in that price was pulled forward to the beginning of the cycle, versus an accelerating trend in prior rebounds," said Zelman, who lowered 2014 expectations for newly built home sales down to 505,000 from a prior estimate of 605,000. Much of that is due to affordability, or lack thereof, due to rising mortgage rates and rising home prices.

"In hindsight, we under-appreciated the lack of new construction capacity via labor, financing and land supply to handle accelerating demand, which resulted in builders pursuing price over pace, either intentionally or due to a lack of alternatives, contrary to their historical volume-driven approach," added Zelman.

While one can deem a certain housing market "healthy" today, due to rising home prices, if those prices rise to far too fast, that health could be in jeopardy. It is therefore important to keep an eye on markets where investors are now setting their sights, such as Atlanta and Charlotte. With investors able to sway markets so quickly, the usual rules of supply and demand don't apply.

(Read more: Million-dollar homes: Down on Main Street)

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

Questions?Comments? facebook.com/DianaOlickCNBC

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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