The Best Places to (Still) Invest

It's far too late to play the buy-and-flip game. But there are some great opportunities out there for those with the patience to buy and hold.

By Paul Kaihla, Janet Rae-Dupree and Michael Fitzhugh, Business 2.0 Magazine

(Business 2.0 Magazine) -- True, America is littered with "for sale" signs these days. And many cities haven't bottomed out yet, and may not for some time. But all the fear and loathing about a housing slump obscures the fact that the end of one cycle marks the start of another.

So it is again this time: Believe it or not, there are housing markets that economists predict will yield returns as high as 72 percent over the next five years - if you can stomach the notion of buying now and not letting go. We asked researchers at Moody's Economy.com to crunch the latest forecast data and identify which cities will see the highest appreciation between now and 2011.

Then, after vetting the list against other macroeconomic research, we arrived at a consensus for the 10 strongest markets. For comparison's sake, we also asked the number crunchers for a list of the cities most likely to go into the tank. Of course, we can't guarantee the accuracy of our crystal ball - but we can promise that you'll know what you're getting into if you decide to take the plunge.

1. Panama City, FL

Projected gain in home prices (2006-2011): 72%

A small city needs one of two things to jack up housing demand: more people or wealthier people. Unlike the rest of Florida, Panama City hasn't really attracted either, mainly because it's isolated on Florida's panhandle. The interstate highway system bypasses it, and the runway at the local airport isn't long enough to support anything beyond regional jets. But now Panama City is poised to host big airliners, more visitors - and a lot more buyers. State and local governments and a top regional developer, St. Joe Co., are planning to build a new airport by 2008 at a cost of more than $300 million. Locals expect the new facility to open up the region the way Southwest Florida International Airport in Fort Myers helped drive a housing boom along Florida's southwestern coast in the 1980s.

"Panama City is an economy waiting to break out," says Steven Cochrane, chief regional economist for Moody's Economy.com. Other factors increasing demand: Property prices are still low by Florida standards, and the local market has already absorbed a price correction after peaking last year. Janet Roan, a Century 21 agent in Panama City, notes that two-bedroom beachfront condos are going for as little as $330,000 - down by more than $100,000 from 2005.

Caution: Local politicians, notoriously cozy with builders, have green-lighted several master-plan communities for future development. If supply gets out of hand, prices will stall.

Metro Region Stats

Median home price (2011): $383,000

Population (2011): 187,000

Per capita income (2011): $40,200

2. Vero Beach, FL

Projected gain in home prices (2006-2011): 64%

Balmy weather, low property taxes, and a cost of living 3 percent lower than that of nearby West Palm Beach make this coastal town an affordable alternative, with sandy shores and the best surfing on the East Coast. "Vero Beach is at high risk in the short term but will move up in the long term," Cochrane says. Here's why: A Florida Atlantic University study says Indian River County and its two closest neighbors will need a projected 154,000 new homes during the next 25 years to house the growing population and replace old structures. A Manpower Employment Outlook Survey predicts growth in construction, manufacturing, and retail jobs too. Per capita income growth closely shadowed that of Martin County, Florida's second-wealthiest, and is gaining on that of Palm Beach County, the state's richest.

Caution: Projected job growth in the region will revolve mainly around lower-wage work, which can dampen home values.

Metro Region Stats

Median home price (2011): $386,000

Population (2011): 147,000

Per capita income (2011): $51,200

3. Bridgeport, CT

Projected gain in home prices (2006-2011): 63%

The last place you'd expect to find undervalued real estate is in tony Fairfield County, home to ultraexclusive towns like Greenwich and Darien, where the Masters of the Universe retreat after a tough day on Wall Street. But a mere 20 miles up the coast lies the hardscrabble city of Bridgeport, which has long suffered from sleazy politics and urban decay but is finally cleaning up its act. The average home price is severely depressed - $280,000, compared with $840,000 in the county's other large urban setting, Stamford. But the wealth is starting to spread: As more businesses have left New York for Greenwich and Stamford, more middle-class workers - entry-level professionals, executive assistants, and so on - have come too, and they're keen to take advantage of bargain prices. "Bridgeport has fixed the corruption," says Norman Feinstein, a principal with New Jersey-based Hampshire Funds. "The local government is pro-development, and buildings are being rehabbed."

Caution: The new demand is not organically driven by Bridgeport's economy. If the New York business climate starts to slip, all bets are off.

Metro Region Stats

Median home price (2011): $784,000

Population (2011): 934,000

Per capita income (2011): $87,000

4. Lakeland, FL

Projected gain in home prices (2006-2011): 59%

Aside from the panhandle and Vero Beach, few places in Florida scream out "buy now" like Lakeland. A house goes for a fifth less than the national median of $227,500, and Lakeland is just 30 minutes from Tampa, a juggernaut of 2.7 million people that's projected to add almost 210,000 more residents over the next five years. Lakeland is the greenfield - actually, orange and yellow, because of the surrounding citrus groves - that developers are divvying up to house many of those newcomers. Meritage Homes (Charts), one of the fastest-growing U.S. builders, plans to build more than 1,300 homes in the area by 2008. "All the big national and regional builders have moved into town," says Larry Comegys, Meritage regional president. "Lakeland has become major." It also sits along I-4, where the density of development is beginning to mirror the Dulles corridor in Virginia.

Caution: Prices tend to top out more quickly in areas like Lakeland that are largely populated by semiskilled service workers.

Metro Region Stats

Median home price (2011): $282,000

Population (2011): 599,000

Per capita income (2011): $39,100

5. McAllen, TX

Projected gain in home prices (2006-2011): 57%

A Hispanic baby boom is working its way through the regional economy, and families will soon be trading up their digs. McAllen is already 85 percent Latino, and the average age of those households is two decades younger than that of non-Hispanic ones. Latino families are also larger: 3.8 members, on average, compared with 2.4 for Caucasians. "These border towns have a housing shortage," Cochrane says. "There's pent-up demand. They'll be looking for more space and better space." He predicts that incomes will catch up to the area's economic growth, currently more than double the state average of 2.9 percent. So far, cheap labor has driven a development boom. Manufacturers locate on both sides of the border to take advantage of low wages and the common market for goods created by NAFTA.

Caution: As the economy matures, higher-paying industries like health care and business services will grow. The area could lose its low-wage "nearshoring" edge, slowing down industrial growth and the demand for new homes.

Metro Region Stats

Median home price (2011): $109,000

Population (2011): 785,000

Per capita income (2011): $23,200

6. San Luis Obispo, CA

Projected gain in home prices (2006-2011): 40%

SLO-Town, as the locals call it, is on the development fast track. It's in the middle of the last semirural stretch of central California coastline, and it's also home to the state's rising star of wine production, Paso Robles, where even French vintners are buying property. The median home price in Paso Robles has shot up by more than 100 percent since 2000. And according to local developer Peter Laughlin, commercial land has skyrocketed from $3 to $20 a square foot since 2001. Yet the natural amenities, proximity to Southern California, and relatively low prices support forecasts of a continuing surge. Thousands of retirement-age boomers, it's said, will sell their SoCal homes for cheaper digs in SLO. Anti-development sentiment also helps. "They're not zoning quickly enough for the demand," Laughlin says. "Either they have to allow more homes or prices will go through the roof."

Caution: Prices are already getting ahead of job and income growth.

Metro Region Stats

Median home price (2011): $615,000

Population (2011): 287,000

Per capita income (2011): $42,900

7. Wilmington, NC

Projected gain in home prices (2006-2011): 37%

Nestled between the Cape Fear River and North Carolina's Inner Bank beaches, Wilmington has great golf, mild weather, natural beauty, and a relatively cheap cost of living, all of which make it popular with both permanent residents and second-home vacationers. But it hasn't always been this way. It was an isolated backwater until 1990, when the final 120-mile stretch of I-40 opened. Now the Research Triangle's well-heeled tech workers can be at the beach in three hours. As the only city of any significant size on the North Carolina coast, Wilmington may be just at the beginning of its boom. It has a seaport, an international airport, and a UNC campus. But it has also maintained its "historic" ambience, bringing it another revenue stream: Hollywood has filmed 180 features here during the past two decades.

Caution: Wilmington has seen a high proportion of speculators invade the region in recent years. Barron's estimated last year that 38 percent of its homeowners are nonresident investors who use their properties only occasionally, if at all. One other word of warning: hurricanes.

Metro Region Stats

Median home price (2011): $297,000

Population (2011): 361,000

Per capita income (2011): $38,300

8. Manchester, NH

Projected gain in home prices (2006-2011): 35%

New Hampshire's financial appeal is readily apparent: It has no income or sales tax, and it's within commuting distance of Boston, one of the most expensive housing markets in the country. Manchester, a former textile mill town, is the largest city in northern New England; neighboring Nashua, which twice has won honors as Money magazine's "best place to live" in America, shares a border with Massachusetts, which has been losing population since 2004. "The edges of greater Boston are beyond the state boundary," notes geographer Andrew Schiller, founder of NeighborhoodScout. "People know they can move out of Boston, get more house for their dollar, and have a great quality of life." And now may be a good time to buy, because appreciation rates started dropping in New England several quarters earlier than in the rest of the country. Prices are expected to burst upward again by mid-2007.

Caution: It remains to be seen whether southern New Hampshire can buck the larger demographic trend: people leaving New England in droves to seek milder, sunnier climes.

Metro Region Stats

Median home price (2011): $305,000

Population (2011): 413,000

Per capita income (2011): $54,200

9. Fort Collins, CO

Projected gain in home prices (2006-2011): 28%

Fort Collins appears time and again on the media's "best" lists - best place to live, best place to retire, best place to raise a family, best "dream" town, even the best place to "reinvent your life." "Great schools, low crime, good jobs in a high-tech economy," Money crowed earlier this year when it named Fort Collins its No. 1 small city. And talk about a lifestyle play: The city is an outdoorsman's fantasy come to life, boasting 40 parks within the city limits, more than 60 miles of hiking and biking trails, three city-owned golf courses, and easy access to whitewater rafting, kayaking, fishing, and skiing. The presence of Colorado State University makes it a college town, to boot. Add to all this that Colorado has been a housing price laggard in recent years, with "relatively anemic" price appreciation, according to economist Andrew Leventis at the Office of Federal Housing Enterprise Oversight. With tech companies fleeing high-priced Silicon Valley, bringing California émigrés with them, now looks like a good time to buy.

Caution: Another tech slump could dampen the housing forecast. With large divisions of Agilent Technologies (Charts), Eastman Kodak (Charts), and Hewlett-Packard (Charts) based here, the regional economy leans mighty heavily on tech-industry growth.

Metro Region Stats

Median home price (2011): $251,000

Population (2011): 306,000

Per capita income (2011): $48,400

10. Atlanta GA

Projected gain in home prices (2006-2011): 24%

Sure, the projected price gain is only a third that of top-ranked Panama City. But it's dramatic for a metro region with a population of more than 5 million people. NeighborhoodScout's Schiller notes its strategic importance as the primary "growth pole" for the entire Southeast, and Bruce Katz, head of the urban development program at the Brookings Institution, says Atlanta is "sprawl on steroids." While the city itself is home to only 400,000 people, the greater region includes 110 municipal governments, each determined to beat its neighbors in growth. With the greatest job growth expected near Atlanta's heart, commuters from far-flung suburbs are fighting harder each day to get back inside the I-285 "perimeter" that encircles the city. That has already pumped up prices in the more desirable north Atlanta neighborhoods, including swank Buckhead, forcing less well-heeled newcomers to look outside the perimeter for a price break. Expect to see the greatest appreciation along Atlanta's southern perimeter fringes, particularly in and around Peachtree City.

Caution: Atlanta has never been known for record-breaking housing appreciation. This year's closure of Ford's assembly plant in Hapeville and the scheduled closure of General Motors's Doraville plant in 2008 could also slow things down.

Metro Region Stats

Median home price (2011): $214,000

Population (2011): 5,615,000

Per capita income (2011): $45,400 Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.