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The 13 Riskiest Housing Markets
By Dave Lindorff

If your hometown is on this list, the value of your house may be in jeopardy.

The real estate bug bit Karen Brodie a few years ago. She left her desk job as an accountant with Fidelity Investments in 2001 and teamed up with a cousin to buy a single-family house in the Boston suburb of Dorchester for $98,000. After spending $50,000 to upgrade the house, the pair sold it a year later for $278,000. Now Brodie and her cousin have expanded their operation to include two pricier three-unit buildings in Dorchester and two three-family units in Rhode Island. With the Dorchester properties now up for sale, the pair could turn a profit of between $500,000 and $800,000 in little more than a year.

Across the country, thousands of people like Karen Brodie are chucking their day jobs to become real estate investors. And why not? The nation is experiencing a boom in property values that has seen the median price of an existing home rise 10% in the past year; 37 areas saw prices jump by at least 15%. Thanks to leverage, which lets you buy a property for a fraction of its cost, you can double your money in a flash.

But soaring prices and the emergence of a generation of wet-behind-the-ears real estate investors stoke fears that the boom is turning into a bubble that will burst. At worst, argues Brodie, 40, home prices in her region could experience "a short correction." But, she acknowledges, "a bubble is something I think about."

Because of the localized nature of real estate, it's hard to argue that there is a national real estate bubble. But a recent report by mortgage giant Fannie Mae says conditions in many markets "mirror past conditions that preceded regional housing busts." And Federal Reserve chairman Alan Greenspan says he is detecting "little bubbles" in certain parts of the U.S. For example, from the first quarter of 2004 to the first quarter of 2005, median home prices soared 46% in Bradenton, Fla., and 33% in the Riverside-San Bernardino area, east of Los Angeles.

Another reason for concern: the growing number of houses bought as investments. Nearly one-fourth of purchases over the past year were investments, and "they're concentrated in a few markets," says Marco Van Akkeren, an economist for the PMI Group, a residential mortgage insurer. He notes, for instance, that 44% of home purchases in Las Vegas over the past year were investments. Markets with a high proportion of investor-owners tend to be risky because investors often have little or no equity in their properties, and they're quick to sell at any hint of a downturn in property values.

So how do you know if your housing market is built on thin ice? There's more to it than simply identifying the areas with the strongest gains in home prices. Job growth, population, median income and affordability all play roles in determining which markets are vulnerable to price declines.

Working with PMI's Housing Risk Study, we pinpointed the 13 most treacherous housing markets. We describe them below.


1. Beantown Bubble

In PMI's view, Boston is the riskiest housing market in the nation. PMI assigns a 53% probability that Boston housing prices will decline over the next two years. The city is at risk despite falling home prices between 1992 and 2001 and a relatively modest annualized appreciation of 7% since then. The problem, says Lawrence Yun, regional economist for the National Association of Realtors (NAR), is that the Boston area has lost 200,000 jobs since 2000 and that housing prices remain high, with a median home selling for $398,000. But David Lindahl, a veteran real estate buyer who runs a local investors' club, looks at the bright side of a possible price decline in Boston. That would mean, he says, "buying opportunities in the foreclosure market."

. Big Apple Bailout

Like Boston, New York City suffered through a housing slump in the '90s. But while job losses were the big problem then, now it's out-migration. "People from New York, especially baby-boomers, are moving out," says Yun. If the trend accelerates, it could cause a problem, particularly for the high end of the real estate market. Meanwhile, prices remain extremely high. The median price for existing homes in the metropolitan New York City area (which includes parts of Connecticut and New Jersey as well as Long Island and Westchester County) stood at $435,000 at the end of the first quarter of 2005, up 18% over the first quarter of 2004. PMI puts the risk of a price decline in New York City at 31% and says it's even money that prices on Long Island, where affordability is becoming a concern, will sink within two years.

3. Lauderdale lunacy

Prices of existing homes in Fort Lauderdale rose 32% over the past year, putting the median price at $321,000. PMI puts the risk of prices falling at a relatively tame 23%, but signs of aggressive buying by investors warrant Fort Lauderdale's inclusion on our list of the riskiest areas. "Fort Lauderdale is very vulnerable," says Kenneth Simonson, chief economist for the Associated General Contractors of America, a builders trade association. "There are lots of reports of speculative buying." NAR economist Yun suggests that there's been so much appreciation that retirees, the traditional buyers of Fort Lauderdale real estate, may be priced out of the market. Europeans remain a source of demand, but that could quickly vanish if the euro continues to weaken, as it has recently.

4. Capital craziness

It's not the amazing performance of the Washington Nationals (formerly the Montreal Expos) that is driving up home prices in and around the nation's capital. It's increases in federal spending, which support a strong job market. The median home price in Washington, D.C., and the nearby Maryland and Virginia suburbs jumped 23% over the past year, to $369,000. Even a modest decline in government outlays could tip the housing market on its side. PMI rates Washington's chances of a slump in housing prices at 19%.

5. Motor City Mayhem

What's Detroit, of all places, doing on a list of the riskiest housing markets? After all, home values rose less than 1% over the past year, to a median value of $151,000. Yet PMI estimates the odds of a price downturn at 38%. It's all about jobs -- at the struggling automakers in particular. General Motors hammered home the point in early June with the announcement that it would eliminate 25,000 jobs by 2007. "With job growth in Detroit flat to negative, and with GM and Ford struggling, prospects for housing look weak," says Simonson. Still, even in a tough real estate town such as Detroit, some investors see opportunity. Sonny Gandee, 25, a self-proclaimed "day trader in real estate," says he's confident that the Hispanic population will continue to grow, so he is focusing on Detroit's Mexicantown neighborhood. Gandee netted $250,000 over three years by investing in properties there, renting them out with minimal rehab, then selling.

6. LA-La Land

Real estate investing is serious stuff in Los Angeles. Two years ago, Marsha Haywood left her $2,000-a-month job running a drug- and alcohol-rehabilitation home for women in order to get into property. Since then, she's acquired four houses before construction. Haywood sells on completion and expects a profit of roughly $35,000 to $100,000 per unit. "You need to play it like a game," says Haywood, 57. Speculation of this sort, plus explosive price increases -- 32% last year and 16% in 2003 -- have some wondering whether prices in L.A. represent one of those bubbles that Fed chairman Greenspan has in mind. Another risk: Local authorities could loosen permit restrictions, opening the door to a substantial amount of new supply. PMI rates L.A.'s risk of a property slump at 40%.

Ripe for a Fall?

These seven areas are also vulnerable to falling housing prices. They are listed in order of risk, with the riskiest first.

7. San Francisco.

How do you make New York look cheap? Easy. Try buying in the City by the Bay. After increases of 13%, 21% and 30% in the past three years, the median home price in San Francisco is $689,000 -- the highest in the nation. The high price of land and tough restrictions on what may be built on that land are major factors. PMI sees a 40% chance of falling property values over the next two years.

8. Sacramento, Cal.

Affordability is a key issue in the hottest market in northern California, where prices have climbed 27% in the past year and an annualized 19% over the past five. A state-budget crisis puts jobs at risk in the Golden State's capital. Odds of a price decline: 40%.

9. Providence.

The New England city that was founded as a home for religious dissenters faces some of the same issues as Boston: no population growth and stagnant job growth. Over the past three years, home prices in Providence have risen at a rate similar to Boston's. PMI puts Providence's housing-price risk at 39%.

10. Minneapolis-St. Paul.

Housing prices in the Twin Cities have climbed an annualized 9% over the past three years. Still, PMI places the odds of a downturn at one in four. With Northwest Airlines, a major area employer, facing problems, job growth and payrolls are stagnating.

11. Denver.

Housing prices in the Mile High City have risen modestly the past four years, including a gain of just 2% over the past year. Job growth has also been moderate. But a concentration of employers in the troubled telecom sector leads to a risk of a home-price downturn, which PMI puts at 21%.

12. Miami.

A surge of buying by retirees, Europeans and South Americans is boosting prices in Miami. Prices skyrocketed 28% over the past year, to $316,000 for the median home. But there's less risk in Miami (PMI rates the chance of a price decline at 18%) than in Fort Lauderdale, just 40 miles to the north, because tourism, services, trade and transportation remain strong.

13. Tampa-St. Petersburg.

The adjoining cities on Florida's Gulf Coast have been popular landfalls for hurricanes of late, but the area is also a popular destination for retirees. Prices haven't risen as high as in Miami or Fort Lauderdale, but the median home price jumped 16% over the past year and an annualized 12% over five years, to $173,000. PMI places the risk of a housing slump at 14%.

I've been saying for quite some time that the only place that makes NYC look cheap is CA.





I think this survey was done based on PMI but I disagree with a few of the markets on the list. They just are not making more land in Manhattan and after a 2 hour 15 minute trip from Jersey City to Westchester last Friday afternoon (30 miles for those wondering, and we never sat in traffic) I am not sure that I agree that babyboomers are leaving the NYC/NJ/CT area in droves.
Also, until CA slides into the ocean, more beachfront property is not being manufactured either.

A lot of SMART people that are closing in on retirement are moving down my way (Austin, TX). They are cashing out of $300,000-$500,000+ equity and buying mansions our way for under $300,000 and using the remainder of their equity for retirement. Since the Austin area has only appreciated about 2% a year for the past several years it is a good place to move and make some $.

I am beginning to understand how crazy the market has been by a story my good friend told me this weekend. He tells me of his grandmothers 800 sq foot house going on the market in Southern California for close to $400,000. It is on the back of a freeway, over 50 years old, and in a fairly shady part of town. For that kind of money, one could move to Texas and have an acre, 3500 sq ft, three car garage, a VERY nice neighborhood, and live within 10 minutes of work.

Our house goes on the market tomorrow. There are 4 or 5 people waiting to see it who want to buy it. This was before the sign was even up. The sign just went up yesterday. It is not even on MLS yet. The new carpet was just done yesterday.
We will probably get bids higher than the asking price. My Dad's house (on the next block) got 4 bids in 3 days OVER asking price. We got 10K more than what we asked for his. And we thought the asking price was risky. It's CRAZY!

I just want a fast closing...our price is 10K more than my Dad's...go figure. Same exact house plan..

wtf? show me that average $689k house, I'll get the money to buy it in a heartbeat... avg. price in da city crossed the $750k mark a few months ago, just hit $800k.

ooh yeah. up we go . sure it'll crash, the shacks in the fog will fall back to more reasonable $700k levels. but for the forseeable future, up, up, and away!

oh, and in the boonies around da city avg. is now $610k. In the decent areas prices are right in line with the city.

http://www.sfgate.com/cgi-bin/article.cgi?...&type=printable

good for them. and there are ten more for each one of them who wouldn't move to Austin if they could get houses like the ones they have here for FREE there (which, at prices of around $1mil for decent single family homes, the $150k Texas equivalent effectively is).

Looks like not a day goes past that there isn't an article about the housing bubble. Sure, prices are going through the roof and there has to be a correction at some time. I don't think though that it will come as fast and hard as the Tech stock bubble.

The house next door to us just sold its first day on the market. I can only assume that the house went for asking price or more - $25,000 more than what we paid. Our houses are laid out similarly - theirs has several upgrades, but the difference is not that huge. We bought in January.

Makes me glad we have enough space to stay for a while if we need to. (That was excellent advice that I kept in mind, AMS.)