America's Most Stable Housing Markets

Nationwide, home prices are falling, sales are sluggish and the number of foreclosures is mounting. Ask any economist and you'll hear that things are bad, and likely to get worse.

Unless you live in Seattle, where the market is slowing but fundamentals remain strong.

The Emerald City has experienced strong price appreciation over the last six quarters, and that's expected to continue in the new year, though at a slower pace. In addition to a very low housing inventory and a strong sales rate, there are fewer non-conforming and high-risk loans on the books than in other cities, which means the area will likely see fewer defaults in the coming months than the rest of the country's markets.

Also primed for a stable year are Pittsburgh, Columbus, Ohio, and Dallas. They follow Seattle in our ranking of the country's 10 most stable markets. All are projected to have median home sale price increases next year, thanks to a combination of factors including lower-than-average inventory levels, little price volatility and high job growth.

To arrive at our list, we teamed with Moody's Economy.com to develop three prediction models based on a range of factors that affect how prices move. These include, among other things, the state of local economies, new construction contracts, foreclosure rates, local credit markets, sales rates, affordability and inventory. Each of America's 40 biggest cities was ranked on all three models, with price appreciation counting one half and sales rates and credit models accounting for the other half. Data were drawn from the U.S. Census Bureau, National Association of Realtors, Equifax, a credit-market tracking firm and Moody's Economy.com.

The first model looks at projected median existing home price growth from fourth-quarter 2007 to fourth-quarter 2008. Factors influencing this data include the market's inventory of unsold homes and the amount of new construction underway, both of which have obvious effects on supply. Housing affordability and local construction costs also play a role, acting as indicators of the market's ability to accommodate first-time buyers and new construction. Next is job growth, which attracts people to the area and increases their ability to buy a home.

Expensive markets like Seattle and San Francisco, which have low housing inventories and low construction costs, do well by this measure. Most of the top performers, however, are affordable, high-job growth markets like Dallas and San Antonio.

"It largely reflects that these markets never went through the boom and aren't going through the severe bust," says Mark Zandi, chief economist at Moody's Economy.com. "Price growth is not great, but [these markets] are not having house price declines. [All markets] are experiencing pricing problems, but in these markets it's less of a problem."

Moody's second predictive model examined market activity by calculating sales rate, which measures how quickly unsold inventory is expected to sell, and turnover, which measures how much of the overall housing stock those sales represent.

For example, the projected volume of home sales in San Francisco for the coming year represents a low 1.1% of the market's overall housing stock. In a market like Los Angeles, hamstrung by foreclosures and inventory glut, a 1% to 2% sales rate is potentially devastating--but given San Francisco's supply-side fundamentals and low foreclosure rates, prices are expected to modestly climb.

The last measure took into account delinquency and foreclosure predictions. By this model, adjusted-rate mortgage- and subprime mortgage-rich Detroit, Riverside, Calif., and Las Vegas got hammered, while Pittsburgh and Seattle performed well.

Regarding this measure, "it's important to differentiate between [delinquencies]: how many people are late relative to their most recent due date and how many people are in the process of losing their home," says Douglas Duncan, chief economist of the Mortgage Bankers Association. "Ninety percent of all 30-day late pays get fixed. Serious delinquencies are 90 days past current due dates."

When lending problems like this occur, the markets hit hardest are those with a high proportion of non-conforming loans. The most troublesome types are subprime mortgages and jumbo mortgages--those that are above the range of Fannie Mae and Freddie Mac's $417,000 securitization limit. Because few banks eagerly take on mortgages that aren't backed by Freddie and Fannie, the spread on jumbo loan interest rates compared to those of regular loans is at an all time high, according to data from HSH Associates, a credit-market tracking firm.

With fewer lenders wanting to take on jumbos and no banks willing to securitize jumbos, that adds another barrier to sales, especially in an expensive market. In Atlanta, for example, where the median home-sale price is $175,500, it's not an enormous setback, but when securitization stops in Los Angeles--where the median price is $593,000--a greater chunk of market activity halts.

As a result, cheaper markets are more likely to be healthier, as loan activity is less constrained.

Still, no market finds itself in a boom. As Zandi points out, discussing which markets are the healthiest "is a relative term."

"It's not like any of these markets are going gangbusters," he says. "Even Seattle: It's been very strong, but conditions are weakening and this year, at best, will be an OK year."

1. Seattle, Wash.

Median home price: $395,000

Annual price change from 2006: 8.9%

Projected price change to 2008: 3.09%

Seattle continually bucks national housing trends. Price appreciation in the Emerald City has been strong over the last six quarters. Besides a very low unsold housing inventory and a strong sales rate, there are very few non-conforming loans, which lessens the chance of widespread foreclosures and delinquencies. While the market is slowing, the strong lending situation and sales rate bode well for the market.

2. Pittsburgh, Pa.

Median home price: $123,500

Annual price change from 2006: 2.7%

Projected price change to 2008: 3.37%

Pittsburgh's growth has been steady over the last year, and with low foreclosure projections based on the state of the local lending market, very affordable housing stock and relatively low inventory, it can overcome the fact that its sales rate is 30th out of the 40 markets measured.

3. Columbus, Ohio

Median home price: $153,900

Annual price change from 2006: -1.2%

Projected price change to 2008: 3.49%

Columbus, like many other cities in Ohio, has witnessed a deteriorating subprime lending situation. While things aren't going to turn around instantly--projections list Columbus as the 17th worst market for delinquencies (out of 40)--the city's sales rate is picking up. Based on Moody's Economy.com calculations, next year Columbus should boast the eighth-fastest sales rate of the 40 markets examined.

4. Dallas, Texas

Median home price: $156,500

Annual price change from 2006: 1.7%

Projected price change to 2008: 5.45%

Just a few years ago, a 5.45% price increase wasn't especially remarkable, but in today's climate that return looks pretty good. Dallas also benefits from strong job and population growth; an abundance of affordable housing stock makes the market very price-inelastic, helping to shield Dallas from the nationwide bust.

5. St. Louis, Mo.

Median home price: $157,200

Annual price change from 2006: 2.7%

Projected price change to 2008: 3.01%

Because area returns have never been high, St. Louis's housing market generally flies underneath the national radar. Its strongest characteristic: a supply-and-demand dynamic slightly slanted toward the seller. Overexpansion has not hit St. Louis in the same way as other large markets, and its sales rate based on the number of households in the city is strong.

6. Cincinnati, Ohio

Median home price: $146,200

Annual price change from 2006: -1.9%

Projected price change to 2008: 2.65%

That Cincinnati performed so well in our calculations is truly a sign of the times. The market has been feeling subprime fallout over the past year, but as it didn't grow much during the boom, it doesn't have too far to fall. Delinquency rates are expected to be in the middle of the pack nationally, but the signs for an accelerating sales rate suggest that the market's inventory problems might soon be resolved.

7. Atlanta, Ga.

Median home price: $175,500

Annual price change from 2006: 0.9%

Projected price change to 2008: 4.4%

Affordable markets like Atlanta don't feel the extreme swings of higher-priced markets. The city's migration and job creation spikes have made Atlanta one of the fastest-growing cities in America. Its current problems are the result of a bloated inventory, especially condos in the beltway, but other fundamentals, including a fast sales rate and a low proportion of non-conforming mortgages, suggest it can burn off its supply glut.

8. San Antonio, Texas

Median home price: $154,300

Annual price change from 2006: 6.6%

Projected price change to 2008: 5.35%

In rapidly growing San Antonio, housing supply and new construction is keeping up with demand; the sales rate next year is expected to be the sixth highest in the country on a per-capita basis. However, San Antonio has a subprime problem that will dampen the success most of the market has enjoyed. Only Detroit is expected to have a higher delinquency rate than San Antonio's 4.5%.

9. San Francisco, Calif.

Median home price: $846,800

Annual price change from 2006: 7.6%

Projected price change to 2008: 2.5%

When it comes to the non-conforming loan market, San Francisco's biggest worry is the very high rate of jumbo loans--those priced over $417,000 and therefore not eligible for Fannie Mae securitization. That's because the median home price is more than double Freddie and Fannie's price limit. Housing prices continue to climb in San Fran, but affordability problems and lending problems in the jumbo market should put a drag on price growth.

10. Fort Worth, Texas

Median home price: $156,500*

Annual price change from 2006: 1.7%*

Projected price change to 2008: 3.09%

Fort Worth is often lumped in with Dallas, though the two cities tied together by a metro area perform a bit differently. Fort Worth's price-growth prospects aren't as strong as Dallas' despite similar sales rates and delinquency rates. The critical differences are in the arenas of job creation, where Dallas outpaces Forth Worth, and that Fort Worth's supply-and-demand dynamic isn't as slanted toward sellers as Dallas.'

Can someone explain to me why falling housing prices is considered to be a bad thing?

Falling and rising being good or bad depends on whether you're a buyer or a seller. That's all there is to it.

However, the NET effect is that it is bad because falling housing prices have a domino effect on the rest of the economy. Builders will have less business because there will be less incentive to build new houses. Which means less jobs for people making the components that make the house, carpenters, bricklayers, landscapers, masons, electricians, real estate agents and lawyers, etc.

On the other hand, falling prices are good for -- buyers, people who prefer open spaces, greenies and the like.

But it has always been like that in a dynamic economy. There is no guarantee that what you're doing now or what you have today will be of value in the future. The stagecoach driver used to be well paid, that changed with the advent of cars. The switchboard operator gave way to automation, the slide rule gave way to the calculator, the mini-computer gave way to the PC, etc.

A few years from now, we'll probably look back at this sorry subprime episode the same way people looked back at the stock market crash of 2000.

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