Tuesday, June 17, 2008

Housing Market Recovery: Which Cities Will Lead The Way?

Downtown Dallas SkylineWhile it might be hard to predict when, exactly, the housing market will recover, UBS seems confident that they at least know which markets will lead the way to recovery. UBS issued a report highlighting five markets they believe will be on the forefront of the housing market's recovery. They selected these markets based on demographics, economic growth, affordability and inventory, according to an article in Big Builder News. The markets selected were Atlanta, Houston, Austin, Charlotte and Dallas/Fort Worth.

None of the five markets selected are much of a surprise. These are all quality, affordable markets that have great job and population growth. If anything, investors looking at these cities might want to be a little worried about Atlanta’s oversupply of housing, but even with that hurdle, Atlanta still has a lot going for it. Overall, I agree with UBS in their assessment that these markets are likely to recover ahead of many other markets. One other thing to keep in mind is that these markets weren’t affected nearly as much by the housing crisis as most other markets. This is mainly because they did not see the type of growth that was experienced in the other markets, so they didn't have as far to fall.

For those who are wondering which markets were on the bottom, according to UBS, those housing markets were Orlando, Las Vegas, Phoenix, Riverside and Tampa. These are also not much of a surprise. These five markets have been hit hard by the housing crisis and there has been a lot of press about their plight. All of these markets are still seeing pretty significant growth, however; during the bubble, their housing prices inflated way too much and now they are correcting back to where they should be. In the long term these markets still present good opportunities, but not at present and certainly not at 2005 pricing.

We don’t know when the housing market will start its recovery, but we can be certain it will eventually happen. The best gauge I can offer is to look at the affordability index and cash flow as an investor. Cash flow is something that you can account for and that you can control; appreciation (at least natural) is not something you can control, so you shouldn’t account for it in your profit projections. Areas that offer cash-flowing properties are unlikely to depreciate much because there is little incentive for owners to sell out at lower prices. In addition, while there are always investors looking for steady cash flow, the same cannot be said for appreciation--at least not anymore. So it is little surprise that UBS believes the housing market recovery will begin in affordable and cash-flow-producing cities.


Anonymous said...

Yes, it is hard to predict the housing market.

Michael Deqel said...

It is hard to predict the market, but I do think there will a sustained recovery, probably seen broadly after the elections and change of administration. No matter who wins, the real estate market recovery will begin with optimism about change, and become self-sustaining. You can read my thoughts about this here.