The real estate crisis has gutted house prices, tipped millions into foreclosure, and rattled the global economy to its core. But for many would-be home buyers, the historic boom and bust have been a blessing in disguise. During the first half of the previous decade, easy credit and speculative excitement worked to make houses increasingly expensive. By the fourth quarter of 2005, median home prices had reached 2.77 times median household incomes. That is sharply higher than the 1.92 average of the 15 years ending in 2003 and too expensive for many families. But the subsequent crash in home prices—values have fallen roughly 30 percent at the national level from their 2006 peaks—has helped restore affordability to this once inflated market. By the third quarter of 2009, the price-to-income ratio—a key measure of housing affordability—had fallen below its 15-year average, to 1.84 for the nation as a whole.
But not all markets have come back to earth with equal velocity. Home prices in many areas remain overvalued when compared with their longer-term averages, while others have become undervalued. To get a better sense where home buyers are most likely to find houses that are undervalued when compared with their longer-term averages, U.S. News turned to Moody's Economy.com. The economics firm provided average and quarterly price-to-income data for each of the nation's 384 distinct metropolitan statistical areas. By comparing the most recent figures with longer-term averages, we were able to compile a list of 10 cities for real estate steals. (It's important to note, however, that many experts believe home prices have yet to hit bottom. For that reason, real estate values in many of the flowing markets could decline further before rebounding.)
1. Memphis: Higher home values pushed the price-to-income ratio in Memphis to nearly 5 in the first quarter of 2006—sharply above its 2.13 average for the 15 years ending in 2003. But the subsequent 17.5 percent decline in home prices has restored affordability to the market. Through the third quarter of 2009, the price-to-income ratio in Memphis was just 1.17, which is significantly below its 15-year average. But while the Memphis market appears to be stabilizing, prices may not have reached bottom yet, according to Moody's Economy.com. A large number of mortgage delinquencies threaten to bring additional inventory to the market through foreclosure. That, in turn, may drag prices still lower.
2. Salinas, Calif.: As in many other markets in California, in the agricultural basin of Salinas, home prices have been hammered by the real estate bust. Home values jumped more than 70 percent from 2002 to 2006. But as the bubble deflated, real estate values plummeted some 65 percent from their peaks. This rapid decline has made houses more affordable to would-be buyers in the area. Through the third quarter of 2009, the price-to-income ratio in Salinas fell to 2.3, significantly below its average of 3.54 for the 15 years ending in 2003. While that's still above the national average of 1.84, it's a steep decline from Salinas's 2005 peak of 7.09. But despite this drop, homes in Salinas are expected to become even cheaper this year as foreclosures exert additional downward pressure on prices, according to Moody's Economy.com.
3. Medford, Ore.: The national housing bust has hit the outdoor wonderland of Medford, Ore., with a one-two punch. Because its timber industry is crucial to the local economy—wood-processing jobs represent at least a quarter of all manufacturing positions—the collapse of the new-home building market triggered higher unemployment in the area. Meanwhile, after moving significantly higher during the first half of the previous decade, home prices have dropped more than 23 percent in recent years. As a result, Medford's already affordable housing market has become even more so. Its price-to-income ratio stood at just 1.01 through the third quarter of 2009, well below its average of 1.46 for the 15 years ending in 2003. Moody's Economy.com expects home prices to hit bottom this year.
4. Washington: As the federal government scrambles to undo the damage of the nastiest recession in decades, home prices in the Washington area have grown increasingly affordable. (This metropolitan statistical area includes portions of Maryland and Virginia as well.) House prices jumped nearly 86 percent from 2002 to 2007 before taking a 31 percent dive. As a result, the price-to-income ratio of the Washington area fell to 1.12 through the third quarter of 2009. That is significantly less than the area's average price-to-income ratio of 1.69 for the 15 years ending in 2003. Still, Moody's Economy.com projects that home prices in the area will continue declining into 2011 before they begin to climb higher.