Where housing will bounce back and when

By Matt Woolsey

updated 5:05 p.m. ET June 10, 2007

When it comes to real estate, the questions on everyone's lips are: How low is low, and when's the perfect time to buy back in?

That moment has passed in Seattle and Charlotte — both metros hit bottom in the first quarter of 2006 and have since posted price gains of 12.3 percent and 6.3 percent, respectively, according to National Association of Realtors (NAR) data.

Ripe for investment? Philadelphia and New Orleans. Based on housing inventory and local economic conditions, both should hit price troughs by year's end and bounce back with moderate gains around 4 percent in 2008.

In markets expected to recover more slowly, such as Boston and Denver, low buyer confidence coupled with a surplus of housing stock has lengthened the slump. NAR chief economist Lawrence Yun points out that buyers are looking for clear signs of a market bottom and are content to wait on the sidelines until then.

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It's easy to see why. Most of the country's real estate markets are feeling the effects of overproduction. A strong market hovers near a 1.5 percent vacancy rate, but the national average currently stands at 2.8 percent and in cities such as Miami, Atlanta and Denver, figures hang around 3.5 percent. In addition, every nugget of good news (a May Commerce Department report said that new-home sales are at a 14-year high) comes with bad news (median price growth is at a 10-year low).

So which other metro area markets stand the best chance of recovery, and when will that upturn occur?

Market corrections follow three basic recovery patterns. A V-shaped recovery where a market experiences a sharp, fast decline but comes out strong once it hits bottom; a U-shaped recovery, where prices decline gradually and recover slowly; and an L-shaped curve, a hard, fast fall with paltry price bounceback following the market trough.

The differences between a V-shaped market and a U-shaped one has to do with barriers to growth. High vacancy rates and high investor share can hurt a market, but if the local economy remains strong and housing stock affordable it's only a matter of how long it takes to absorb the excess inventory.

Tampa is a perfect candidate for a V-shaped recovery, according to research from Moody's Economy.com, an economic analysis, forecasting and credit risk firm. The local economy remains strong, and subprime lending is relatively low. Tampa's problem? A high investor share that lead to high vacancy rates. When the market turned sour in 2005, more than 25 percent of Tampa homes were owned as investment properties. Investors are quicker to flee during a downturn, thus creating a glut of available housing stock. In Tampa's case, vacancy rates now stand at 3.5 percent.

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