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| The Basics | The next hot housing markets
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Average prices nationwide are soaring, but for every San Diego, theres a Tucson sunny, relatively cheap and growing fast.
By Liz Pulliam Weston
In any boom market, true bargains get harder and harder to find. As prices rise, investors have two basic choices: Go along with the herd, or dig even deeper to find values others have (so far) missed.
If you're sitting in a white-hot, overpriced real-estate market, you may despair of ever finding those bargains either as a house-hunter or as an investor. But deals still exist.
"In any neighborhood, there are unwanted properties, undesirable locations" that could be turned around, said real-estate expert Ilyce Glink, editor of ThinkGlink.com. Around any city, "there's the town two towns over that could be today's opportunity."
Then there are the less obvious places that have been overlooked or beaten down before suddenly springing to life. Witness this list of towns that were latecomers to the real-estate party but where values have recently zoomed:
| 12 fast-growing cities that are still cheap | | City | 1-year price rise | 5-year rise | Median home price | | Phoenix-Mesa-Scottsdale, AZ | 30.5% | 67.3% | $169,400 | | Coeur d'Alene, ID | 29.0% | 59.9% | $169,000 | | St. George, UT | 28.3% | 47.7% | $200,000 | | Pensacola-Ferry Pass-Brent, FL | 25.8% | 62.0% | $131,100 | | Tucson, AZ | 22.3% | 61.4% | $177,300 | | Lakeland, FL | 19.4% | 56.7% | $108,000 | | Albany-Schenectady-Troy, NY | 18.2% | 65.2% | $161,300 | | Jacksonville, FL | 18.2% | 66.9% | $150,700 | | Eugene-Springfield, OR | 17.4% | 40.5% | $164,900 | | Allentown-Bethlehem-Easton, PA | 16.9% | 58.2% | $207,300 | | Charleston-North Charleston, SC | 16.9% | 49.2% | $111,300 | | Wilmington, DE | 16.2% | 62.5% | $180,000 | | USA national average | 13.4% | 68.3% | $218,000 |
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Source: Office of Federal Housing Enterprise Oversight, National Association of Realtors, local Realtors associations
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Below-average prices, above-average appreciation
In compiling this list, I looked at the latest home-price appreciation survey from the Office of Federal Housing Enterprise Oversight, which supervises mortgage buyers Fannie Mae and Freddie Mac.
I was searching for towns and cities that had experienced above-average price appreciation in the last year after lagging the national average in prior years. I culled from the list several cities where median home prices already exceed the national average, including Flagstaff, Ariz.; Bend, Ore.; Bremerton, Olympia and Tacoma, Wash.; and San Francisco, San Jose and Santa Cruz, expensive California cities where appreciation slowed after the tech-stock crash of 2000 but where values are once again climbing.
One more place just barely missed the list: lovely Prescott, Ariz., where a 28.6% price rise in the past year helped push it slightly over the average national five-year appreciation mark (70.6%, compared to 68.3%).
What really counts
As diverse as they are, the cities on the list do have a lot in common -- and you should pay attention to two factors in particular if you want to discover the next hot market:
Bustling employment. The clich is that the three biggest factors to real-estate success are location, location, location. But equally important to appreciation: jobs, jobs, jobs. Few places can thrive for long without a growing job market and steady in-migration.
Florida and Arizona, homes of five cities on the list, boast the fastest job growth in the country. Oregon was third and Utah ranked fourth, according to the FDIC, with St. George topping the nation at 10.7% employment growth.
Employment gains helped revive the fortunes of once-foundering towns like Allentown and Bethlehem, Pa., and are fueling growth in Albany, N.Y. as well. Charleston is meanwhile bucking the near-recessionary levels of unemployment found in the rest of South Carolina as tourism and business investment keep job growth strong.
An influx of retirees, second-home buyers and urban refugees. Florida and Arizona have long been retirement havens, but now other areas are benefiting from an influx of relocators -- not just retirees, but people looking for second or primary homes away from urban centers.
Many folks, for example, are selling homes in expensive areas like California to buy cheaper properties out of state and using their excess equity to supplement their incomes.
"They're utilizing the equity in their home to support their lifestyle," said Richard Crum, a fee-only financial planner in Newport Beach, Calif., who specializes in real estate. "I've seen more of that in the past two years than I've seen in 40 years of practice."
Few of these urban refugees are relocating to Albany or Allentown, of course. The towns that benefit from this trend tend to be the areas with mild winters, small-town feel and abundant recreational opportunities. Those factors helped transform Bend, Flagstaff, Prescott and now St. George from their former slumber. A similar renovation is happening in Coeur d'Alene, where recreation-oriented tourism has replaced natural resources as the largest industry.
4 reality checks
If you're trying to find the Next Big Place, or the Next Little Place That Will Get Bigger, you might want to keep the following in mind:
You should want to live there. Well, duh, right? But Crum saw plenty of people rushing out to less and less desirable areas during the last California real-estate boom in the late 1980s. When prices crashed, they fell harder in the barren outskirts than they did in the beach towns.
Popularity can have its drawbacks. If your primary goal is appreciation, you want other investors to discover your find eventually. But too much attention can have its drawbacks. For example, there's so much new housing construction going on in Coeur d'Alene that the FDIC warns the area could become overbuilt, which could depress further appreciation. Slower, steadier growth can be better for an area's quality of life -- and ultimately, its housing values.
Cheap doesn't necessarily mean a bargain. Some towns that are inexpensive now will stay inexpensive for a long, long, long time. There simply won't be enough growth or demand to drive much price appreciation.
So if you can afford them, you shouldn't necessary rule out the expensive markets. Not only might they still have room to run, but they don't have to appreciate at a very fast rate to bring substantial rewards.
A $1 million property that appreciates by 10%, for example, adds $100,000 to its owner's net worth. The owner of a $100,000 property would have to see 100% appreciation to see a similar gain. (If you are determined to house hunt in a pricey area, read Find a bargain in a hot housing market for some survival tips.)
Nothing lasts forever. Even if home prices don't crash, they can't continue appreciating at 20% rates indefinitely. You should keep that in mind if you're considering a mortgage that doesn't build equity or if you're counting on appreciation to make up for negative cash flow on a rental property. You could find yourself in deep trouble should the local economy slump and prices tumble.
That doesn't mean you shouldnt take a calculated risk, said Glink, author of 100 Questions Every First-Time Home Buyer Should Ask. "I do think there's money to be made today, tomorrow and after the boom ends," Glink said. "It still pays to be a pioneer."
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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