Real estate markets in areas where prices haven’t yet risen rapidly, living is affordable, jobs are plentiful and economic conditions are strong may offer the best investment opportunities this year, according to a study released Thursday.
The “Real Estate Cycle in 2006” study by First American Real Estate Solutions investigates where the residential real estate market stands today and where it is likely to go based on historical economic information.
“Through this analysis, we provide a framework for assessing where the market may be heading to assist real estate professionals with identifying potential opportunities and risks,” said Christopher Cagan, First American’s director of research, author of the report.
The report suggests that markets where prices have not risen rapidly may be the best part of the country in which to purchase or invest during 2006.
“Places that haven’t had a runup, where you can get a house for $200,000” are getting attention from investors now, and rightly so, according to Cagan. In his study, Cagan analyzed the National Association of Realtors’ median sales price index for existing single-family homes for over 100 metropolitan areas from 1988 through 2005.
“These are the parts of the country that have not been getting all the attention,” Cagan said. “California, Florida, New York City, Las Vegas, have already had rapid price rises.” Now, cities in the heartland may be taking the spotlight, Cagan said.
The cities Cagan mentioned are examples of cyclic markets, according to the study. In cyclic markets, prices go up and down in waves 10-15 years long.
In linear markets, the study said, prices move up a few percent a year with little variation, as in Wichita, Kan., Atlanta, and Nashville, Tenn. Hybrid markets, found in Chicago and Seattle, combine the elements of both, and catch-on markets usually are linear but recently experienced a strong move up or down in prices, such as Phoenix, Detroit and Las Vegas.
Now that the cyclic markets have reached their peak, linear markets may present the best opportunities for buying and investing. Other examples of these markets include North Carolina and Minneapolis.
“A lot of lenders are looking in those areas. They want a place where there’s less risk and things are pretty stable and there’s a strong job market,” Cagan said.
“Texas is an excellent area. I found that the market has not reached the affordability threshold there,” the research director said. “Things are heating up in Texas. They may have a boomlet there. The foundation of the economy is good.”
A strong economic foundation is key, Cagan said. “The opposite would be Detroit, where the job situation is poor,” he said.
“Investors and developers are looking to these areas partly because prices are affordable and there has not been a big runup and the downside is minimal. Prices might go down a few percent, but there’s never been any bubble talk in North Carolina or Nashville, Tennessee,” Cagan said.
“People are looking for good, solid areas,” Cagan said. “They want to retire, they want a second home or a home to invest in. In the heartland, you can put down $20,000 and accomplish that goal. That’s harder to do in, say, California.”
During the last several years, home values have risen rapidly in almost every market in the nation, the report says. In many coastal areas, prices have more than doubled since 2000.
Now prices in most areas are rising at single-digit levels, flattening or slightly declining — an indication that conditions have returned to normal following a strong bull market, according to the study.
Utilizing current information and assumptions about future prices, interest rates and metropolitan income levels, the study discusses five scenarios ranging from strongly optimistic to strongly pessimistic.
The assumptions are that income will rise 4 percent because of inflation, and interest rates will tighten to between 6.7 percent and 6.8 percent.
The scenarios: Affordability remains the same, prices decline 6 percent; prices decline 10 percent, affordability increases by 4 percent; prices go down 20 percent, affordability goes up 14 percent (probably too far-fetched); prices remain the same, affordability goes down 6 percent; prices go up 20 percent, affordability declines 26 percent.
Cagan also invites the reader to use his models and equations to come up with their own scenarios and predictions.