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10 USA Housing Markets That Will Collapse This Year

Sep 11 • Categorized as Cash Flow Properties

Collapse
Some things are inevitable

collapse of the housing marketThe United States real estate market collapse is not over by a long shot.  We are experiencing the most unusual financial times in modern US history.  If you think it can’t get worse…keep reading.

The statistics in this article was derived for accuracy purposes from Real Estate on MSNBC.com in an article written by Michael B. Scuter and Douglas A. McIntyre.

I’ve thrown in my own two cents and my practical approach for assimilating information and then creating an action plan.

The best guestimate is that real estate values will drop significantly in ten specific markets over the next year and I think a few other areas of the country are extremely vulnerable.  This doesn’t mean the entire USA is in the toilet, but if you’re not careful, your investment dollars could be.

With all the information available with a click of a mouse, it is imperative that you interpret the information and look at it through your common sense filter.  Never accept someone else’s opinion as a fact, including mine.  I read and review a lot of information and assimilate all that I see and read and then make decisions to move forward.

More importantly, I am in the streets talking and walking with other landlords, property managers, tenants, wholesalers, attorneys, bankers and others.  By observing different perspectives and actually discussing topics that affect the people around me, am I able to derive m own conclusions.

So, let’s start with the cities that are supposed to drop significantly in value and sum up my personal conclusions at the end of this article.

The following cities were identified by Wall Street to drop ten percent or more by 2012.  Now, we know Wall Street is always right – NOT… but they have some statistics to back this up and I believe there is something to their analysis, especially in the areas with which I am most familiar.

Methodology: They used data from the Fiserv-Case-Shiller Indexes which tracks real estate activity in 380 cities.  They selected those that are forecast to have the largest percent price drop between the first quarter of 2011 through the first quarter of 2012.  Adding unemployment information, household median income and other pieces of information gives a complete picture.

There is a direct correlation to home prices, unemployment and household median income.  The unemployment rate in some of these cities was over 18%.  By the way, that unemployment level is similar to Spain, Greece, Portugal and Italy.  Would you buy houses there in that kind of market?  The inventory in these cities is large and the demand is low because the unemployed cannot be buyers.  The fear of further price drops has paralyzed buyers, which further exacerbates the problems in these cities.

All the efforts of the Federal Government to prop up house values have failed in these markets.

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Here are the markets as depicted by Wall Street starting with the worst:

Florida
Expected price drop: – 16.6 percent

  1. Naples, Florida

floridaExpected price drop: – 16.6 percent
Median family income: $62,800 (137th highest)
Unemployment rate: 10.5 percent
Median home price: $225,000 (40th highest)
Projected to hit lowest level: Q4 2012
“Like much of southwest Florida, Naples was one of the fastest-growing communities in the country as it prepared for the millions of baby boomers on the cusp of retirement. When the housing bubble burst, however, the thousands of construction projects for condominiums and retirement communities were halted or lost money, and home values plummeted. From peak home value in 2006, prices dropped by 55 percent. They are expected to keep falling through next year more than any major city in the country. By Q1 2012, home values will drop an additional 16.6 percent, or nearly $40,000.”
As a resident of Tampa, Florida, I have a true perspective of Florida real estate’s high property taxes and high insurance rates which destroy cash flow from rental houses and further erode house values.  We stopped buying cash flow houses in Florida three years ago.

  1. Riverside-San Bernardino, California

Expected price drop: -15.6 percent
Median family income: $59,700 (190th highest)
Unemployment rate: 13.7 percent
Median home price: $181,000 (70th highest)
Projected to hit lowest level: Q1 2012
“Like so many industrial cities in California, Riverside-San Bernadino is being affected by the recession and housing crisis more than most other parts of the U.S. Unemployment has hit 13.7 percent, home vacancy and rental vacancy rates are high, and home values are plummeting. Median home prices are down more than 55 percent from their peak in 2006. By the beginning of next year, prices are expected to drop an additional 15.6 percent, or nearly $30,000.”
The biggest problem with California is that it is California.  With a state deficit of 28 billion this year, they will continue to cut services and raise every kind of tax imaginable.  They already have a state income tax that peaks at 10% which will hurt cash flow rental houses.

Vegas
Las Vegas – Expected price drop – 13.9 percent

  1. Las Vegas, Nevada

las vegasExpected price drop: -13.9 percent
Median family income: $58,900 (196th lowest)
Unemployment rate: 12.4 percent
Median home price: $140,000 (90th lowest)
Projected to hit lowest level: Q4 2012
“Las Vegas was one of the center points of the meteoric growth in the first half of the 2000s, only to be followed by a catastrophic fall in the second half. Between 2008 and 2011, home prices in the city dropped by 42.3 percent, the second greatest decline in the country. Although home values in the city are already more than 58 percent off their peak, they are projected by Case-Shiller to drop an additional 13.9 percent by Q1 2012, and then 6.3 percent more by Q1 2013.”
Las Vegas’ problems are just beginning.  People go to “sin city” with disposable income to gamble or go to conventions.  Conventions are way down.  Disposable income is way down.  Worse… is the train no one seems to see.  It’s online gambling!  Casinos are actually lobbying to get their piece of “online” gambling so people can stay right at home, hundreds and thousands of miles away and they can lose their money in the comfort of their living room.  Vegas will not come back in my lifetime and I’m in my mid-fifties.  If you buy cash flow houses here, who would you ever sell them to?  There is no exit plan.

Detroit
Detroit, Michigan – Expected price drop – 13.4 percent

4. Detroit, Michigan,
detroitExpected price drop: -13.4 percent
Median family income: $49,000 (47th lowest)
Unemployment rate: 12.7 percent
Median home price: $42,000 (the lowest median home price)
Projected to hit lowest level: Q2 2012
“Since the recession began, Detroit has been the horror story for plummeting home values, foreclosures, vacancies, and unemployment. To date, Detroit’s median home price of $42,000 is the lowest among all 385 major metropolitan areas. While the motor city has been languishing for some time before the recession, the drop in home value has been steadier, as opposed to the rapid drop-offs seen in cities in Florida, Nevada, and California. Detroit’s already record-low values are expected to drop an additional 13.4 percent by the first quarter of 2012.”
Heck, I thought Detroit would be first.  I regret to write that we acquired a few dozen houses here a few years ago.  What a mistake!  Liberal eviction courts favor the tenant.  High real estate taxes destroy rental cash flow.  High homeowner’s insurance destroys cash flow even more because if they can’t steal the furnace, they will burn the house down.
I’ve walked the streets (actually stayed in the car) where 8 out of 10 houses were burned out shells.  It looked like a scene out of World War II – and who wants to rent the others?
This is a welfare city and state and my advice to all readers is to avoid it like the bubonic plague.  It will suck your wallet dry.  And don’t listen to anybody that talks about guaranteed rent by the Feds, from Section 8 or the country with welfare.  Once you make the Feds your partner with their rent subsidies they are like the Mafia – you can’t get them out and you’ll be lucky to dump the house for a fraction of what you paid for it.  Hey, if you like this area, call me – I’ve got a few dozen rented out in good condition.  I simply want to re-allocate my assets to better areas.

5. Merced, California
Expected price drop: -13.2 percent
Median family income: $42,900 (8th lowest)
Unemployment rate: 18.6 percent
Median home price: $112,000 (38th lowest)
Projected to hit lowest level: Q2 2012
“Merced has a median family income of just $42,900, placing it among the ten poorest major cities in the country. In 2008, the city’s property lost 46.1 percent of its value. This was the second-greatest depreciation in home value for a city since at least 1980. The city’s median home prices are expected to drop an additional 13.2 percent by the beginning of next year.”

Miami
Miami, Florida – Expected price drop – 13 percent

6. Miami, Florida
miamiExpected price drop: -13 percent
Median family income: $47,800 (32nd lowest)
Unemployment rate: 13.4 percent
Median home price: $175,000 (76th highest)
Projected to hit lowest level: Q2 2013
“At 13.4 percent, Miami has one of the highest unemployment rates of any major American city. Home values are above average, but are down by more than 50 percent since 2006. Partially as a result of the staggering unemployment rate, the value of the city’s homes is projected to decrease by another 13 percent by the first quarter of 2013. What is even more disturbing, prices will then likely fall an additional 10.1 percent. If this second drop occurs, it will be by far the greatest depreciation of property values in the country in an area already decimated by current low prices.”
The best thing Miami has going for it is South America.  Ask a person in Bogata, Columbia what the most northern city of Columbia is and they will tell you – Miami.  With the influx of South American money, Miami will have some areas that will rebound quicker than most.  The problem is the high cost of real estate taxes and homeowner’s insurance.

California
El Centro, California – Expected price drop – 12.1 percent

7. El Centro, California
californiaExpected price drop: – 12.1 percent
Median family income: $43,300 (10th lowest)
Unemployment rate: 28.6 percent
Median home price: $130,000 (70th lowest)
Projected to hit lowest level: Q1 2012
“El Centro is located five miles from the Mexican border, and is one of the poorest cities in the country. Median income is just $43,300 per family, the tenth-lowest in the U.S. Unemployment is at a staggering 28.6 percent. Between 2006 and 2011, home prices decreased by more than 50 percent. According to a report in the Imperial Valley press, one home was sold in the El Centro area before the recession for $390,000. In 2009, that home was listed at $200,000. Prices are expected to drop an additional 12.1 percent by the first quarter of 2012.”
Five miles from the Mexican border?  Think about it and forgetaboutit.

8. Salinas, California


Expected price drop: – 11.8 percent
Median family income: $62,100 (145th highest)
Unemployment rate: 12.8 percent
Median home price: $240,000 (34th highest)
Projected to hit lowest level: Q2 2012
“Salinas is a small coastal city located 25 miles south of San Jose. Since 2006, the median value of the 125,000 houses there decreased in value by more than 61 percent. This is the fourth biggest decline from peak home value among all major American cities. More than 40 percent of this drop occurred in 2009, the year after the housing bubble burst. Unemployment in the city is at 12.8 percent, well above the national average of 9.2 percent. Several companies in the area, including food processing company Romco, expect to continue to lay off workers in the coming months, which should serve to further depress home values.”
Are you starting to see a pattern in California?  There are some great areas, but the debt of this state will impact even the good areas as they cut services and increase fees and taxes of all kinds.  Also, don’t lose sight of the fact the California is earthquake central and we all know it’s coming…you know… the big one.  When it comes, Nevada could be the western shoreline for the USA – which could be good for house values in Las Vegas!  There are better places to invest in cash flow houses.

9. Bethesda, Maryland
Expected price drop: – 11.5 percent
Median family income: $114,100 (the highest)
Unemployment rate: 5.1 percent
Median home price: $417,000 (5th highest)
Projected to hit lowest level: Q3 2012
“Bethesda, the extremely wealthy D.C. suburb, has the highest median family income in the country — $114,100. It also has the fifth highest median home price, at $417,000. That position may change, however, as Case-Shiller projects home values will drop by more than $60,000 by next year.”
I’ve been to Bethesda – it’s beautiful and prices will probably drop, BUT it doesn’t make any sense for cash flow houses as they are too expensive and the ROI would be very low.  Not as bad as Hong Kong where traditional real estate investors receive about 1% cash on cash return and hope for appreciation.  But you know what?  Hope is not a good strategy.

10. Fort Lauderdale, Florida
Expected price drop: -11.1 percent
Median family income: $58,800 (194th highest)
Unemployment rate: 11.8 percent
Median home price: $196,000 (55th highest)
Projected to hit lowest level: Q2 2013
“Since 2006, home prices in Fort Lauderdale have dropped by nearly 50 percent. A full 28 percent of that drop occurred in 2009 alone. As was the case throughout most of Florida, the collapse of the housing bubble decimated the construction-based economy. The unemployment rate of nearly 12 percent is evident of the construction sector’s disastrous decline. The value of the 686,000 homes in the Fort Lauderdale area is expected to get even worse through at least the second quarter of 2013. Between Q1 2011 and Q1 2012, the median home price is projected to decline an additional 11.1 percent. Between 2012 and 2013, that number will further decrease by 8.7 percent.”
Here we go again in Florida, but guess what?  The area north of Fort Lauderdale is doing well right now.  In fact, a property manager that I work with is seeing properties snapped up in Palm County and Martin County.  He tells me good properties don’t last and if someone is really desiring Florida properties, then Palm and Martin counties are your best bets for cash flow.  If this is you, contact me and I will put you in touch with one of the best property managers I know.

Now that Wall Street provided the statistical analysis for the above content of this article, here is my biased, personal perspective after buying houses in 12 states in 2009.

  1. Don’t invest in areas of declining population.
  2. Don’t invest in liberal states that favor tenants.
  3. Avoid frigid climates of the Northeast and Midwest.
  4. Buy where boomers are moving to.
  5. Buy in pro-business states.
  6. Buy where real estate taxes and homeowner’s insurance rates are low.
  7. Buy newer properties.
  8. Never get subsidized rents.  That means wrong house in wrong area.

All this doom and gloom information bodes well for real estate investors who can make the distinctions on which specific region, states, cities and neighborhoods to invest in.
Gloom and Doom – bring it on.  This is a reality check for global investors to do their due diligence and get the courage of their convictions and take action.
It doesn’t get any better than this in the USA to pick up great bargains for cash flow and capital gains – if you buy right.  Because, if you BUY RIGHT, YOU WILL RETIRE RICH.

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13 Comments

  1. Looks like you got your information straight from that 24/7 Wall Street report that came out a month ago. In regards to Naples, you’re way off track. You may want to look at the real statistics from the Naples Area Board of Realtors (NABORS), which shows a different story. Not to mention, this city is not just made up of retirees living on social security. Our winter residents, visitors, and tourism industry hardly puts us in the same category as typical housing markets. Our luxury housing market continues to get stronger. Just because you live in Tampa doesn’t mean you understand Naples. In fact, you don’t. You’re just mimicking what you’ve read online put out by opinion-based and unqualified bloggers.

  2. I’m pissed that the Saint Louis area didn’t make the list. We top the lists of everything else negative including “Most Dangerous City in America”. I think its skrimnayshun!

  3. Real Estate taxes are Cops, Firemen, Teachers.
    Homeowners Insurance is the ‘Shadow Government’.-Bankers.
    Add a touch of Military Imperialism, Wall Street, and Entitlements.
    Whattya got?
    Your Future.

  4. They bet on the wrong Horse- when they bailed out the banks with TARP -had they backed the home owners and gave them zero percent loans on their homes this economy would not be in trouble- of course I am dreaming here- but real estate has always been about timing… my first home I paid 16 thousand and it sold not to long ago for 900 thousand – location being the key word- Home owners were ripped off by wall street yet no one has gone to jail… so who wants to buy a home now- when rates should be lower for home owners- 1 to 2 percent across the board for everyone!!! that will bring back the economy ! again dream land

  5. I have invested in income real estate for almost 20 years and I can tell you that if you apply all 8 of your requirements you will not find ANY real estate market in which to invest in the US. The best a person can do is to have as few negatives as possible.

  6. Thank you for your write up. I am an overseas property investor located in SouthEast Asia and have been bombarded with ads and seminar selling the exact type of properties you advise against investing in.

    I still think the USA offers good property investment looking at the steep drop in prices and lower exchange rate but have difficulty deciding where to buy.

    Any recommendations?
    Can you recommend a site where the property tax or rental income tax for different states in America is listed?

    Thanks

    June

  7. Thank You for an insightful article.

  8. Now that you have indicated the worst 10 markets,how about giving us in your opinion, based on facts, statistics, and your 8 criteria, the 10 best markets to buy, whether for rents/cash flow and/or for capital
    appreciation. Thanks.

  9. The only problem with real estate is the price. New passive solar homes that sell for $50,000 will sell. It can and will be done.

  10. Author thinks an earthquake will make Nev. a costal state confirms the delusional thinking here.

    Ergo, his entire forecast stinks of bias. I expect more from this site.

  11. Nice to NOT see my fair state of Arizona in a worst performing list. Not too surprised about the California picks but would not have thought Naples, FL. Thanks for a great post. By the way, keep an eye on the Phoenix area. Our inventory is very low and the initial numbers for September look like we will see some upward push in home values, especially in the sub 250K market.

  12. A real estate trainer named Kelle Sparta has written an open letter with a solution to the housing crisis.

    Sparta’s letter is located at: http://www.housingmatrix.com/index.php/solving-the-housing-crisis-an-open-letter-to-president-obama.html

    Her plan is very sound and it not only ethically rescues both banks and homeowners, it also creates a sound land-backed investment vehicle for the rest of us.

    Please read about her plan and if you agree with something along those lines please write and article or blog entry about it and share it with your friends, because resolving the housing crisis is good for all of us!

    In Liberty,
    Michael

  13. Delfin Labao,

    I am curios if you used a Realtor to sell your house for a US$881,000 profit?

    Agreed you would have a deduction of US$250,000 for you an an additional US$250,000 for a spouse but
    that still leaves a taxable profit of US$381,000 at 15% = US$57,150.00.

    Was a 1031 Echange explained to you where you could move out of your house, rent is and change it into
    a 1031 Exchangeable property?

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