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| In Search of the Best Markets for Future Housing Returns |
| Written by Jonathan Smoke | |
| 09.14.2007 | |
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Discuss this article on the forums. (0 posts) Yesterday’s post highlighted the most oversupplied and under supplied housing markets in the country. Markets with large total permits overhang from the last three years would most likely remain buyers’ markets. On the flip side, those with the least overhang didn’t necessarily translate into clear cut ideal markets for investment as economic conditions and home price prospects may still create some challenges to overcome.  For those investors, builders and developers with the freedom of choice on markets to be in for the medium and longer term, we set out to create a set of metrics to rank all markets in the U.S.The metrics we ended up using came from the evolution of work we have done with national builders, developers and investors, and more recently, research we have conducted to better measure local market housing risk for lenders managing debt portfolios. After several iterations, we’ve ended up using a composite index for the basis of our market rankings. The index is composed of four key metrics that measure the current local housing market equilibrium, the prospects for the local economy over the next five years, likely home price appreciation over the next three years, and the possibility for home price declines in any of the next five years. The resulting index calculations identified the following 20 markets with the most promise: 1. Durham, NC 2. Victoria, TX 3. Abilene, TX 4. Florence-Muscle Shoals, AL 5. Houma-Bayou Cane-Thibodaux, LA 6. Albuquerque, NM 7. Cumberland, MD-WV 8. Lake Charles, LA 9. Odessa, TX 10. Morristown, TN 11. Idaho Falls, ID 12. Brownsville-Harlingen, TX 13. Atlanta-Sandy Springs-Marietta, GA 14. Scranton--Wilkes-Barre, PA 15. Reading, PA 16. Anchorage, AK 17. Kennewick-Richland-Pasco, WA 18. Pascagoula, MS 19. Wenatchee, WA 20. Austin-Round Rock, TX What an interesting set of markets! Durham, Victoria and Abilene top the list as they score highly on every metric. The rest of these top markets tend to do very well on all but one metric. For example, Austin has been oversupplied in permits in recent years, but few markets come close to Austin for economic prospects. Scranton, PA has the weakest economic prospects of this group but the housing market is currently at or near its equilibrium level, and home prices there are very stable and likely to rise significantly through 2009. Atlanta has relatively weak price appreciation forecasted compared to the rest of these markets, but it is positive appreciation and it has a very low probability of seeing price declines. One of the most interesting characteristics that these markets have in common is that most of them have a relatively low concentration of large national builders represented in their markets. Durham (along with neighboring Raleigh), Albuquerque, Atlanta and Austin are the biggest housing markets represented here. Despite its size, Atlanta is still a very fragmented market where the large public builders have less than 35% of market share. Albuquerque, Austin and Durham are the only markets with a high share concentration of big builders. It’s interesting to consider if the operational effectiveness of the big builders to grow rapidly may have contributed to the larger markets’ inventory issues and now price instability. Whether or not that’s true, the intelligence is suggesting that the best opportunities may not be in the top 50 markets where the big builders have concentrated. I will look at the bottom twenty markets next. We are considering packaging this analysis into a report for sale to those who need to review opportunities across markets. If you have an interest, let us know by contacting us or posting a comment to this forum. 
We're always looking for feedback from our readers.
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