Housing Markets That Will Be Strongest by 2014

At some point, everything stops falling. Sometimes things hit bottom with a bone-crunching thud and just lie there in a heap. Sometimes they bounce back up at least part of the way. The U.S. housing market is in the latter camp.

While it's unlikely that U.S. home prices will return at any time soon to the highs of the bubble years, some local markets are showing resiliency. Even more encouraging, the forecast in numerous regions across the country is for a healthy recovery by 2014.

While four years may seem too distant to offer many U.S. homeowners much reassurance, the outlook could be worse. Taking into consideration such factors as employment, foreclosure rates, income growth, demographic trends, and construction costs, Moody's Economy.com and Brookfield (Wisc.)-based financial services industry information firm Fiserv (FISV) estimate that by 2014, U.S. home prices will be 7.2 percent above 2010 levels, with the strongest growth in the Pacific Northwest.

In the short term, the waning impact of the first-time homebuyer tax credit and increasing foreclosure activity will keep the housing market anemic in most places. Fiserv and Moody's expect U.S. home prices to decline a further 4 percent before reaching a trough early next year, by which time prices will have fallen 32.9 percent from the peak levels of 2006.

promising gains—as some markets drop

"Prices have been falling for four to five years now," says David Stiff, Fiserv's chief economist. "Hopefully the labor market will be making more steady improvements by next year."

Already housing has shown some subtle signs of stabilization. In the first quarter, U.S. single-family home prices rose an average of 2 percent year-on-year—the first national gain since 2006—according to the Fiserv Case-Shiller Indexes. The trend is promising, with the increase driven by homebuyer tax credits and gains in such traditionally strong markets as San Francisco and Washington, D.C. says Fiserv. Still, prices in already battered markets continued to fall: Detroit, Las Vegas, and many Florida markets experienced double-digit drops.

Stiff says he expects to see home prices bounce up and down near their lows for the next two to three years, especially in the markets that experienced the largest price bubbles.

The most robust market in the forecast is Washington State's Bremerton-Silverdale area, a quiet naval community across the Puget Sound from Seattle. Home sales and new construction in the area have slowed in 2010, but Fiserv and Moody's Economy.com expect prices there to shoot up by a total of 44.7 percent over the next four years—9.7 percent annually—the highest forecast among 384 metropolitan statistical areas surveyed nationwide. Price levels have fallen about 21 percent from 2007 peak levels, according to the Fiserv Case-Shiller Indexes.

Bremerton-Silverdale: Less distress

One factor setting Bremerton-Silverdale apart has been a stronger economy than the rest of the U.S., says Stiff. The unemployment rate in the area is 7.2 percent, compared to 9.5 percent nationally, according to June data from the U.S. Bureau of Labor Statistics. Bremerton's military demographic has helped to sustain employment. The Naval Base Kitsap and the Puget Sound Naval Shipyard provide numerous local jobs, says Ken LeMay, a real estate broker in Kitsap County, which includes the Bremerton-Silverdale area.

Stiff adds that while the area has a large number of foreclosure and pre-foreclosure homes, the market is less dominated by distressed sales than many other markets. In May, foreclosure resales made up about 12 percent of sales in Bremerton, compared to 19 percent in the U.S. as a whole, according to Zillow.com.

Matthew Gardner, an economist and principal with Gardner Economics in Seattle, states in a first-quarter report about the western Washington real estate market: "I believe that a bottom is being formed relative to house values and that unless we see a massive flood of distressed houses coming to the market (which is, in my opinion, unlikely), we should see continued stability and ultimately, growth in values in our region."

While Silverdale and Bremerton are doing far better than many other communities, LeMay says construction has slowed so much that the county building department is now open Monday through Thursday—as opposed to every weekday when the market was more active. Any increase in price will simply depend on supply and demand, he says.

would such fast growth be unhealthy?

While most maintain a cautious attitude about the rebound, some predict undersupply in a few years. Celia Chen, a senior director of housing economics at Moody's, recently told SmartMoney.com that such states as Washington, Oregon, New Mexico, and Utah—where supply and demand are now in balance—are most likely to be undersupplied by mid-2012.

Mike Pitts, owner and general manager of Windermere Real Estate in Silverdale, says the 44.7 percent four-year growth forecast for Bremerton-Silverdale is hopeful, but might also be problematic. "I don't know if it's healthy to grow that fast in a short period of time," he says.

These forecasts may sound alarming—if not impossible—to some, but Fiserv's Stiff says: "The risk of another bubble is pretty low." Compared to the rate of appreciation during the housing boom, which was as high as 50 percent annually in some areas, the forecasted rates are reasonable, he says. "It's a reaction to prices being so low, and appreciation will be low after that."

Some hard-hit markets will remain depressed for a while. The outlooks for Miami, Naples, Fla., and Atlantic City, N.J., are the nation's weakest, with prices expected to drop by 14.8 percent, 13.7 percent, and 12.1 percent, respectively, over the next four years.

alternating optimism and pessimism

A year ago, Stiff predicted that the market would reach its trough by the end of 2010. By some measures the recovery is lagging. "What changed that was first time homebuyer tax credit," he says. "It created a temporary increase in prices, so we're expecting a [moderate] double dip."

He expects sales and prices to bump along the bottom as buyers try to jump into the market at the lowest point. This will result in alternating bouts of optimism and pessimism regarding the housing market's recovery. There is added confusion because some areas hit bottom earlier and the timing of corrections is not the same across all regions. The fluctuations will make it difficult to know exactly when the housing market has reached its trough.

Perception is key, LeMay says: Buyers are waiting for prices to reach bottom. In many markets, next year might reveal valuable opportunities.

Click here to see where housing is forecast to rebound the most by 2014.

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