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Which housing markets will bounce back first?

Atlanta, Charlotte and major Texas cities could be leaders, analysts say, but not until late '09

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By Janet Morrissey

June 23, 2008 6:01 am ET

As economists and housing experts desperately look for signs of a bottom in the crumbling housing market, some investors are starting to make plans based on which major markets are predicted to rebound first.

"Housing is a very local business," said David Goldberg, an analyst with UBS Securities LLC in New York. Although certain issues are affecting housing demand nationwide, "recovery and timing of recovery" are going to be much more locally driven, he said.

"We believe Texas; Charlotte, N.C.; and Atlanta will be among the first to recover," Mr. Goldberg said. On the flip side, he added that Florida, inland California, Phoenix and Las Vegas will likely lag the rebound.

Markets that didn't see a huge run-up in home prices and a glut of new construction over the past five years, and those that are enjoying good job growth, will likely lead the rebound, said Mr. Goldberg, who penned a 40-page report on the housing recovery.

The UBS report assessed demographics, housing inventory levels, job growth, unemployment trends and affordability in 13 major markets.

"If there's a lot of population growth, then you need more housing, whether it's owner-occupied or rentals," Mr. Goldberg said. If a big part of a city's job growth is fueled by a sector that's crashed, such as residential construction, then this will slow the rebound, he added.

Affordability took into account not just home prices but down payment requirements, interest rates, property taxes, maintenance expenses and tax breaks.

Mr. Goldberg named Austin, Texas; Charlotte, N.C.; Atlanta; Dallas/Fort Worth, Texas; and Houston as the cities offering the earliest recovery based on the report's criteria, while Orlando, Fla.; Las Vegas; Phoenix; Riverside, Calif.; and Tampa, Fla., will take the longest to rebound, he said. The lagging markets will continue to face falling home prices as they struggle to whittle down the huge inventories of single-family homes and condominiums.

Analysts don't expect the market to come back soon.

Managing director and lead home-building analyst Bob Curran of Fitch Ratings Ltd. in New York expects Washington and cities in Texas to rebound earlier than other parts of the country. "Logically, it will either be markets that went into decline the earliest, such as Washington, or markets that didn't get overbuilt and overpriced as much, such as Texas," he said.

Escalating fuel prices could delay a rebound in areas outside major metropolitan markets, such as West Virginia and the Inland Empire in California, where the price of commuting from a suburb into a major city is no longer affordable. "That long commute now proves to be very expensive," Mr. Curran said. "Those outlying areas are going to be dead for a long time."

Mr. Goldberg is predicting that the national housing market won't hit bottom until the second half of 2009, while Mr. Curran said the trough will be in late 2009 at the earliest.

Once a bottom occurs, it could still take many months — or even years — before the inventory clears and prices rebound, depending on the individual market.

A report issued in May by New York-based RREEF Alternative Investments, the asset management branch of Deutsche Bank AG of Frankfort, Germany, made similar predictions about an earlier recovery for Texas and the city of Washington but added a few other markets as well. It also named Baltimore, Boston, Charlotte, Chicago, Portland, Ore., Raleigh, N.C., San Francisco, San Diego, San Jose, Calif., Seattle and the New York/ New Jersey corridor as housing markets able to clear out their housing inventory within a two-year horizon.

"There could be some attractive opportunities in these markets, where the turnaround horizon is relatively short," the report said. Markets that will take more than three years to rebound include Miami, Jacksonville, Orlando, Palm Beach and Tampa, Fla., Las Vegas, Phoenix, and Riverside and Sacramento, Calif., according to the report.

The latest housing data appear to back this up.

U.S. home prices fell more than 14% in the first quarter, marking the largest year-over-year price drop-off in two decades, according to the Standard & Poor's/Case-Shiller National Home Price Indices. The plunge is occurring five times faster than in the last housing recession, with the biggest year-over-year declines occurring in Las Vegas, where prices tumbled 26%. This was followed by Miami, which fell 25% and Phoenix, which declined 23%. Charlotte saw prices tick up 0.8%.

New-home sales tumbled 36.3% in the first four months of 2008, compared with the comparable period a year earlier, Mr. Curran said. "And we've been in a decline since early 2006, so the [year-over-year] comparisons are not challenging," he said. "They're very weak."

A report recently surfaced that Charles Prince, former chief executive of New York-based Citigroup Inc., had slashed $300,000 from the asking price on his home in affluent Greenwich, Conn., and there were still no takers. His five-bedroom home, which currently lists for $5.85 million, has been on the market for six months.

Making matters worse, foreclosures are growing at a record pace. The number of foreclosure filings surged 48% in May from a year earlier, and repossessions more than doubled, according to RealtyTrac Inc. of Irvine, Calif. The company's vice president of marketing, Rick Sharga, said the number of bank-owned properties in the market totaled 700,000 at the end of May, up from 440,000 at the end of 2007 and 225,000 in 2006. He's predicting they'll reach 1 million by yearend.

All of this bodes poorly for markets that are already struggling with inventory gluts.

While foreclosures can present opportunities for bargain hunters, they can also pose significant risk. "A lot of those foreclosed are really beaten up because the owner gives up on the home," which could require significant repairs, Mr. Curran said. He added that there are growing reports of banks and other entities paying the angry foreclosed homeowners extra cash so they don't trash the house upon leaving. "People will just rip all the appliances out, rip pipes out and do miscellaneous damage in anger," Mr. Curran said.

Richard Drew, a certified financial planner with Hayden Financial Group in Westport, Conn., which manages about $100 million in assets, said the early-recovery markets offer an opportunity, especially for baby boomers who might be looking to relocate. "My wife and I eventually will be relocating to North Carolina, so I've been following that somewhat," he said.

Mr. Drew is recommending that his clients take advantage of the early-rebound markets. "I don't think they should be driven to an area solely by the price," he said, "but if it coincides with where they would want to locate, I think it's a really good opportunity to do that."

E-mail Janet Morrissey at jmorrissey@crain.com.

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