Home Prices: Now for the Good News

• Chart: PMI U.S. Market Risk Index -- 2nd Quarter 2008

When the headlines about the housing market are apocalyptic, the last thing a homeowner wants to do is sell. But a funny thing happened to Jeff and Jennifer Boyd when they put their three-bedroom house in Philadelphia’s Graduate Hospital district on the market this summer: They turned a profit. Just 45 days after the listing went up, a buyer snapped up the property for $555,000—$29,000 more than the Boyds paid in 2006. “We were pretty hesitant, knowing what the market is like,” says Jeff. “But a few weeks later, it was gone.”

Here’s a surefire way to start an argument: Suggest that the housing market has reached bottom. To be sure, the near-term outlook is still grim, and nobody is forecasting a rapid nationwide rebound. But there are signs that the overbuilding and speculative pricing that inflated the bubble are working their way through the system. In October 2005, near the peak of the boom, the median sales price for a U.S. home reached 7.3 times per capita income; by this May it had fallen to 5.7, in line with historical norms. Nationally, the rate of decline in sales is slowing, and in some regions sales numbers have actually perked up. “The indicators are starting to look better,” says Adam York, an economic analyst with Wachovia.

Why the disconnect? For starters, the national sales figures that get so much attention—and remain depressing—are brought down by boom-and-bust markets like Las Vegas, Miami and Phoenix. David Berson, chief economist with mortgage insurance firm The PMI Group, says that if hard-hit states like California, Arizona, Nevada and Florida are taken out of the statistical mix, the picture is much more promising. According to PMI’s “risk index,” which estimates the odds of prices falling in a given market, at least 65 percent of the nation’s 386 metro areas have less than a 10 percent chance of seeing lower prices two years from now. What’s more, the government’s sweeping bailout of the financial sector could boost the housing market by making borrowing easier for buyers.

We dug into those numbers as well as other forecasts and analysis to determine which markets are in the best shape for a rebound? We also talked with housing experts to learn which kinds of neighborhoods and suburbs are thriving. Our search led us to 25 metropolitan areas that look particularly promising, and there are more than a few surprises. Here, we profile seven of the best-looking markets; for the full list of 25, see November’s issue of SmartMoney magazine.

Seattle

The Emerald City is that rare major metro area near the coast that is not on a nausea-inducing roller-coaster ride. While home prices in Florida and Southern California are in a free fall, homeowners here are experiencing a gentler landing. Of course, that’s partly because the ride up was not as euphoric—home prices here peaked at 65 percent above January 2003 levels, compared with more than 95 percent in Los Angeles. Thanks to well-paying mega-employers like Microsoft, Amazon.com and Boeing, unemployment remains under 4 percent. That, in turn, has kept median sales prices from falling far. Just as encouraging: Only 11.5 percent of local homeowners who bought within the past five years have negative equity on their property, well below the national average of 29 percent, according to the real estate services firm Zillow. That indicates there won’t be a flood of foreclosures and short sales around the corner.

Among Seattle’s neighborhoods and suburbs, yesteryear’s star performers—affluent areas like the Victorian-studded Queen Anne district or Redmond, home of Microsoft—are beginning to slide back a bit. The most resilient part of the region lies across the Duwamish River from downtown, in West Seattle. The small community is directly accessible by only one bridge. That can lead to traffic snarls, but many residents simply bike 20 minutes to jobs downtown. On weekends the relative seclusion means the 2.5-mile Alki Beach promenade along Elliott Bay doesn’t get too crowded. As long as people like great views of water, mountains and city skylines, “those homes will always maintain their value,” says local broker Febe Cude. Dave and Alison Keith recently sold their two-bedroom townhome in West Seattle for $289,000, up more than 25 percent from their purchase price four years ago. They plowed that windfall into a home in the same neighborhood with twice the living space and a fenced-in yard, for $429,000. “You’re always nervous, but I feel like things are holding up well here,” Alison says.

Des Moines

The specter of a prior real estate bubble helped Iowa avoid the current bust. After an agricultural debt crisis in the 1980s, when many farmers found themselves owing much more than the value of their land, Iowa began an aggressive push to diversify its economy. Many of the resulting development subsidies have contributed to a thriving region around Des Moines, the capital. Major insurance and financial-services companies call Des Moines home, including the Principal Financial Group. The media company Meredith Corporation, publisher of Ladies’ Home Journal and Better Homes and Gardens, also maintains its headquarters in the city. Young people flocking to jobs here from other parts of Iowa have helped keep housing demand steady. But homebuyers in these high-paying, white-collar jobs don’t need to stretch much to afford the metro area’s median home price of $156,600.
Though it’s undergone a slight slowdown this year, Des Moines’s real estate market never crashed, in part because it didn’t experience much of a run-up. “Nobody here was flipping houses,” says David Swenson, an economist with Iowa State University.

The suburb of West Des Moines is a particularly strong market, with only six to seven months of inventory, compared with 10 or 11 months in other parts of the metro area. Much of West Des Moines’s housing stock is new construction, both condos and single-family homes, but some historic flavor remains in the Valley Junction neighborhood, a collection of antique shops and other retailers in storefronts dating from the late 19th century. Tom Bernau, 47, moved this spring with his wife and 2-year-old son into a new, five-bedroom home on the third fairway of a private golf course in the city. The couple moved to West Des Moines for its excellent public schools, but before their son starts kindergarten, he’s keeping busy at the country club next door. “We can take our golf cart from our house and go to the pool without going on a city street,” Bernau says.