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The real estate bug bit Karen Brodie a few years ago. She left her desk job as an accountant with Fidelity Investments in 2001 and teamed up with a cousin to buy a single-family house in the Boston suburb of Dorchester for $98,000. After spending $50,000 to upgrade the house, the pair sold it a year later for $278,000. Now Brodie and her cousin have expanded their operation to include two pricier three-unit buildings in Dorchester and two three-family units in Rhode Island. With the Dorchester properties now up for sale, the pair could turn a profit of between $500,000 and $800,000 in little more than a year.
Across the country, thousands of people like Karen Brodie are chucking their day jobs to become real estate investors. And why not? The nation is experiencing a boom in property values that has seen the median price of an existing home rise 10% in the past year; 37 areas saw prices jump by at least 15%. Thanks to leverage, which lets you buy a property for a fraction of its cost, you can double your money in a flash.
But soaring prices and the emergence of a generation of wet-behind-the-ears real estate investors stoke fears that the boom is turning into a bubble that will burst. At worst, argues Brodie, 40, home prices in her region could experience "a short correction." But, she acknowledges, "a bubble is something I think about."
Because of the localized nature of real estate, it's hard to argue that there is a national real estate bubble. But a recent report by mortgage giant Fannie Mae says conditions in many markets "mirror past conditions that preceded regional housing busts." And Federal Reserve chairman Alan Greenspan says he is detecting "little bubbles" in certain parts of the U.S. For example, from the first quarter of 2004 to the first quarter of 2005, median home prices soared 46% in Bradenton, Fla., and 33% in the Riverside-San Bernardino area, east of Los Angeles.
Another reason for concern: the growing number of houses bought as investments. Nearly one-fourth of purchases over the past year were investments, and "they're concentrated in a few markets," says Marco Van Akkeren, an economist for the PMI Group, a residential mortgage insurer. He notes, for instance, that 44% of home purchases in Las Vegas over the past year were investments. Markets with a high proportion of investor-owners tend to be risky because investors often have little or no equity in their properties, and they're quick to sell at any hint of a downturn in property values.
So how do you know if your housing market is built on thin ice? There's more to it than simply identifying the areas with the strongest gains in home prices. Job growth, population, median income and affordability all play roles in determining which markets are vulnerable to price declines.
Working with PMI's Housing Risk Study, we pinpointed the 13 most treacherous housing markets. We describe them below.
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