Real Estate
America's Best Long-Term Real Estate Bets
Matt Woolsey, 12.16.08, 04:00 PM EST
These 10 markets are the least likely to overheat and bust and the most likely to have vibrant economies moving forward.
In Depth: America's Best Long-Term Housing Bets Drive along Interstate 80, just outside the city of Sacramento, Calif., and scores of gated and planned communities await. Only they're not what developers envisioned. Sidewalks are empty; homes are unoccupied.
Blame the heady days of the real estate boom. Easy-to-acquire mortgages, plenty of open land and generous zoning provided new homes to scores of buyers. Between 2000 and 2005, Sacramento-area builders doubled production.
But as prices dropped and demand dried up, builders cut back. This year, there are expected to be 6,140 new constructions in the Sacramento metro area. That's down from 20,370 in 2005, according to the National Association of Home Builders (NAHB). Median prices are now $212,000, down from $375,000 in 2005. For many residents, this is old news. Sacramento home builders and buyers engaged in the same behavior leading up to, and following, the Savings & Loan crisis. That's when construction doubled and then quartered once prices fell. Indeed, it's a market prone to booms and busts, which not a good sign for long-term investment.
In Depth: America's Best Long-Term Housing Bets
That's not the case in Seattle, New York or Philadelphia, which are far less volatile when it comes to building and vacancy spikes in tough economic times. There's just less room to grow and few laws that make it easy to do so. In these markets, building activity doesn't rise as hastily during national booms, and, as a result, doesn't crash as dramatically during slowdowns (based on historical volatility and current market conditions).
Behind the Numbers
Forbes.com evaluated the 40 largest Census-defined metro areas using the last 25 years of data from NAHB. We calculated volatility in supply (new construction) and demand (vacancy rates). Our measure tracks the degree of difference between how specific housing markets expand or contract in relation to the national market. If, for example, a city's building rate grows by 5%, versus 1% nationally, there's usually a similar pattern on the way down. That may be good for a flipper in the right place at the right time, but it's not good for long-term investing. The top 10 cities on our list are those that grew in value, but avoided large swings in times of excess and stress.
No surprise, metro areas in California, like San Diego, Los Angeles and Sacramento--some of the nation's most noteworthy boom-bust markets--performed poorly by this measure. Folks from all over the country move to California in boom periods, given its diversified industry, which includes everything from oil to entertainment. This is reflected in housing construction rates, which rank near the top in years when the stock market rises and jobs are plenty. Problem is, they take off when the party's over, leaving mass unsold inventory, something home builders have yet to fully account for even though it's a pattern dating to the 1980s.
"Migration in California tends to be very elastic," says Mark Zandi, chief economist of Moody's (nyse: MCO - news - people ) Economy.com. "People move there quickly when the economy is good and leave when it's not."
forbes.com |
