The 13 Riskiest Housing MarketsBy
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." <
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