A lot of people are wondering where to invest in order to catch the next real estate boom. I don’t have a ready answer for that, but Forbes magazine was nice enough to tell us where the riskiest markets are.
1. Miami, Fla.
Due in part to escalating insurance costs, Miami produced a price-to-earnings ratio that was sixth highest. Despite a loan-to-value rating around national averages, a high vacancy rate of 3.5%, and a 43% share of adjustable rate mortgages was enough to propel Miami to the top of the list of riskiest housing markets.
2. Orlando, Fla.
Its moderate price-to-earnings ratio didn’t do enough to set off an astronomical vacancy rate (over 5%) and scores in the bottom third for 90%-plus loan-to-value mortgages and share of adjustable-rate mortgages. Strong local economic indicators like job growth and immigration significantly mitigate the risk, but the city is in a vulnerable position.
3. Sacramento, Calif.
A high vacancy rate of 3.3%, which ranked 10th worst, the seventh highest price-to-earnings ratio despite consecutive quarters of falling prices, and a share of adjustable-rate mortgages in excess of 50% made Sacramento the riskiest investment in California. A very low number of loan-to-value ratios above 90% means the market can bear the stress of continued price drops should the local economy take time to absorb the slump.
4. San Francisco, Cailf.
More than 70% of the market’s residential loans over the last year were adjustable-rate mortgages, which puts San Francisco in a very vulnerable position should interest rates rise. A middle-of-the-pack vacancy rate of 2.4% is well above healthy, which means that any future price dips for the highest price-to-earnings ratio market could hurt.
5. San Diego, Calif.
San Diego has the lowest share of mortgages with loan-to-value ratios above 90%, which bodes well for any future price decreases, suggesting the city can stand some short term strain. Its problems are a 2.8% vacancy rate, the nation’s third-highest price-to-earnings ratio despite prices not yet reaching a trough, and above-90% loan-to-value and adjustable-rate mortgage shares–among the top three in the nation.
6. Phoenix, Ariz.
There isn’t one poison-pill measurement for Phoenix. A high 3.1% vacancy rate hurts, but so does the 10th-worst price-to-earnings ratio, despite significant downward price pressures over the last year. Adjustable-rate mortgages rank eighth-highest of cities measured and loan-to-value ratios above 90% are in the middle of the pack. The question is whether Phoenix’s labor force and local economy, which is highly tied to the building industry, can sustain a prolonged slump.
7. Kansas City, Mo.
Things look dicey for Kansas City. Vacancy is above 4%, and the share of mortgages with loan-to-value ratios above 90% is the worst of the cities measured. The housing market is strained and ill-equipped to handle any future price declines. At least, with its low price-to-earnings ratio, mortgage costs are little compared with what one could earn renting the property.
8. Cincinnati, Ohio
The share of adjustable-rate mortgages and those with loan-to-value ratios above 90% usually have an inverse relationship. Not in Cincinnati. The city has the 5th-highest share of 90%-plus loan-to-value mortgages and, at 30%, an above-average share of adjustable-rate mortgages. This exposes the market to both price-decrease problems as well as interest-rate hikes.
9. Chicago, Ill.
Chicago is a traditionally stable market, but is currently under pressure. Its 2.3% vacancy rate isn’t unmanageable, nor is its price-to-earnings ratio, which is the 12th highest nationally. Chicago’s problem is a very high share of adjustable-rate mortgages (45%) and a middle-of-the-road share of mortgages with loan-to-value ratios above 90%. Having a high share of one is sustainable if there’s a low share of the other, but in a scenario like this, both lenders and borrowers have elevated risk.
10. Denver, Colo.
Vacancy is high, at 3.7% – it’s the list’s fifth worst, which means that the city has a ways to go before it experiences price recovery. Adjustable-rate mortgages comprise 40% of Denver’s mortgages, which exposes a market that’s already struggling to problems if interest rates should increase.
I’m not sure if I’d invest in any of these cities, but just in case there are any concerns, they’ve also included the Most Overpriced Cities. The top three cities are
1. San Diego
which incidentally are also amongst the least affordable, along with Los Angeles and San Francisco.
I definitely wouldn’t be buying in any of these 5 markets, whether for investment or as a personal residence.
In other interesting news today, Beazer Homes (BZH) is rumored to be facing bankrupcy.
American Home Mortgage (AHM) was up today, jumping from $1.25 to ~$4.60. It closed the day with news that it would close down tomorrow and the stock dropped in After-Hours trading back to a $0.72.
CFC and WCI, both of which I lost money on shorting too early were down and are likely to head lower in the long term. In the short term they’ll probably bounce, just like IYR. I had sold naked calls on IYR, which I closed out on Tuesday for a decent profit. Since then IYR has bounced up again. I look for another entry point and buy SRS instead this time.