KEY POINTS:
By now, it's clear where most of the pain is being felt in the US housing market.
Rising foreclosures and financing rates, a growing housing inventory and tightening credit are hobbling areas that once led the nation in the home boom.
If you study the home-price patterns in
the August 30 report from the Office of Federal Housing Enterprise and Oversight (Ofheo), you can see gains in states where prices are lower compared with major metropolitan areas and where there is job growth and population increases. Ofheo is the watchdog agency of Fannie Mae and Freddie Mac, which buy mortgages from lenders, injecting liquidity into the market.
Population and job shifts can be red herrings, though. It's clear that some of the steepest declines are hitting where housing inventory is highest and sub-prime financing prevalent.
Yet many of the hardest-hit markets are in states where price, job and population growth was robust. Nationally, the picture is getting darker. The number of Americans signing home-sale contracts for previously owned homes in July dropped the most since records began six years ago, according to the National Association of Realtors, a Chicago-based trade group.
Overall, prices fell 3.5 per cent in 20 major areas in the second quarter, reports S&P/Case-Shiller, the largest dip since the group started compiling the index in 2001.
It's no surprise that where unemployment rises, housing prices shrink. The Detroit area, stung by layoffs from US automakers, not only posted an 8.4 per cent jobless rate in July - it was 4.6 per cent nationwide - home values retreated 1.4 per cent for Michigan as a whole in the second quarter, ranking it among the worst markets.
Since the US real estate market is composed of hundreds of smaller metro markets, several of which were not as severely affected by the bubble or subprime mortgages, not all of the news is gloomy.
Owing to the mobility of occupations through broadband access, many workers moved from the priciest areas in California and the East Coast to the Rocky Mountains and southern states.
Traditionally, innovation centres have been concentrated in the Northeast, the North Carolina piedmont; Chicago's western and northern suburbs; Austin, Texas; Silicon Valley, California; the Seattle suburbs and Southern California.
Areas that support job growth through innovation are the best long-term investments because affluent, educated and productive homeowners spread the wealth and their neighbourhoods appreciate.
You can often conclude that where the knowledge-worker base is growing, so are home prices.
Innovation workers fleeing overdevelopment and high home prices in coastal states are often finding more-affordable lifestyles inland.
Where should you avoid? Places that produce little in the way of innovation and were havens for speculation. Bargains will abound in Florida and Las Vegas.
Patterns can deceive. It's always a fool's game to look at past performance and think it represents a long-term trend. Just as millions of homeowners and lenders were convinced that the boom would continue unabated, there's no predicting how long or how deep the housing recession will be.
You have to buy carefully in any area. If population or job growth stalls or recedes, the local housing market will certainly hiccup.
There's also mass psychology at work. When people are worried about jobs or the general economy, they cut back on buying homes, cars, appliances and other consumer items. For most property investors, a buy-and-hold strategy is the best tack in a declining market.