Fall Real Estate Guide: Bargains, Bubbles And Stable Markets

Dallas, Texas
Dallas, Texas
Dallas, Texas

Take a quick look at America’s hardest-hit housing markets, and you might think you’re looking at some once-in-a-lifetime bargains. Miami down by almost half from its peak? Las Vegas off 55 percent and Phoenix selling at a similar discount? Get your checkbook, you’ve got a McMansion to buy.

But hold off a minute, says Ingo Winzer of real-estate consulting firm Local Market Monitor, which tracks and forecasts 330 metro areas around the country.

Just because a local housing market has sunk like a stone, doesn’t mean it can’t drop some more. And that’s exactly what many cities around the country are facing right now.

“Real estate cycles last for many years,” says Winzer. “Even though prices have been dropping for a couple of years in some markets, they could keep dropping for several years more.”

The culprit: A horrendous employment situation, which has already seen almost seven million jobs lost since the end of 2007. Even if the recession has technically bottomed out, people are still being laid off, and that will continue to be a drag on the housing market. Couple that with skittish lenders and the sheer number of distressed mortgages, and you have a toxic mix that still hasn’t been resolved.

“We’re definitely close to the bottom,” says Celia Chen, senior director of housing economics at Moody’s Economy.com, who points out that the Case-Shiller 20-city house-price index has finally been ticking up. “But we expect prices to start descending again by the end of this year. With so many foreclosures still in the pipeline, we don’t expect a bottom until the middle of next year.”

But not all is lost. All real estate is local, after all, and your hometown has its own unique prognosis. To make his forecasts at Local Market Monitor, Winzer compares income levels to housing prices, to determine which markets around the country are overvalued or undervalued. He then pairs that with local jobs outlook, to predict what’s in store for each community. His take on the best (and worst) housing bets for the next year:

Best Expected Performance:

In this group are many locales that never experienced the housing boom in the first place. Since they never climbed to unsustainable heights, they didn’t have a price cliff to fall off. Among this group are southern spots like Baton Rouge, La.; Columbia, S.C.; and Little Rock, Ark.

Long-suffering upstate New York cities like Syracuse and Buffalo also make the list, as does Pittsburgh, none of which saw the huge price runup of the sunbelt.

Finally, Texas takes a total of four spots on the list, with Dallas, Houston, Fort Worth and San Antonio. Because of the oil-patch bust years ago, they’ve already worked through an extended era of weak prices.

With all of these communities, don’t expect huge price jumps in the near term, but only appreciation of up to 5 percent a year. After all, in this brutal economy, even flat home values are considered outstanding performance.

Stable Performance:

In a whipsawed market, most homeowners would love a little stability right now. That’s what buyers can expect in Oklahoma City, expected to fall only 1% in the next 12 months; Denver, down just 2%; and Nashville and Raleigh, both expected to sag a mere 3%. Also seeing only minor, if any, declines will be St. Louis, Mo.; Louisville, Ky.; and Omaha, Neb.

Home prices in those area are close to what Winzer calls their ‘equilibrium,’ with housing prices at reasonable levels that can be sustained by local incomes. While these regions might see very slight declines over the next 12 months, thanks to macro issues like the sluggish economy, their long-term outlook appears healthy.

Worst Expected Performance:

Miami Skyline
Miami Skyline

Here’s where you’ll find many of the faded stars of the housing boom, which could continue to see double-digit declines over the next year.

Miami prices could get chopped back another 16 percent, Las Vegas by the same amount, and Phoenix by even more, at 17 percent.

Embattled Florida figures most prominently on the list, with Sarasota, Orlando, West Palm Beach and Pompano Beach also making the top ten. So does California, including foreclosure-riddled Stockton, Bakersfield and Fresno.

Even Portland, Ore. in the Northwest isn’t immune, slated for an 11 percent decline.

In many cases the market may be overshooting to the downside; it may not be fair to existing homeowners, but such is the powerful momentum of housing cycles.

“Some of these markets have fallen so that they’re not overpriced anymore, but the depth of the local economic situation is so bad that they’ll continue to fall below their equilibrium price,” says Winzer. “So new buyers, wherever they live, should want to live in their home for a long time, not take out too big of a mortgage—and not expect prices to go up anytime soon.”