Last of the red-hot housing markets

NEW YORK (Money Magazine) -- When Elisabeth and Tom Merrill decided to sell their home in Wenatchee, Wash. (pop. 107,000), they braced themselves for a long slog.

The couple and their four kids were bursting out of their 2,400-square-foot house, but they had read about the nation's slow-as-sludge real estate market and expected the worst.

But their house sold in 10 hours for $387,000, 80% more than they paid six years ago. "I was thrilled," says Elisabeth. "I can't believe how fast it happened."

While housing prices increased only 3.2% nationally in the year ended June 2007, according to the Office of Federal Housing Enterprise Oversight (OFHEO), a government regulator, prices in Wenatchee shot up 24%, partly because a recent influx of retirees boosted demand for housing.

Wenatchee is not the only hot spot bucking the national trend. Markets in the Pacific Northwest, Utah and Colorado still boast annual appreciation rates of 10%-plus, along with a scattering of bright spots in the South and even in the East and the Midwest.

How to account for these exceptions?

For the most part, the iron laws of supply and demand explain what's going on, with the added element of wild and crazy speculation. If you understand how such factors are playing out in these red-hot markets, you'll be better able to anticipate changes, and develop smart housing strategies, right at home.
It's the Demand, Stupid

The basics haven't changed. Job growth and rising incomes boost demand for, and prices of, housing.

Take Grand Junction, Colo. (pop. 140,000). The area is home to one of the country's richest natural gas fields, and local energy companies have recruited new employees, ballooning the city's work force by 26% since 2002 to about 63,000. The median price of a house in Grand Junction soared 65% in the past five years and 14.3% in the past year.

"Along with previous price gains, job growth is by far the most significant variable in forecasting growth," says Robert Shiller, co-founder of a home-price research company and professor of economics at Yale.

Whether Grand Junction will be able to sustain that steep growth curve depends on whether jobs keep increasing and people come to take them.

"If you don't have strong population growth, it's likely that the market won't appreciate in the long term," says Celia Chen, director of housing economics for Moody's Economy.com.

Case in point: Denver, only a mountain range away. The number of jobs has grown by only 7.8% in the past five years, holding house prices to a tepid 13% rise over the same period.
Supply Side

If it's not demand pushing prices up, it's got to be you-know-what.

One city where housing is tight: Portland, Ore., which has passed some of the most stringent growth restrictions in the country.

The government limits new housing outside a 400-square-mile perimeter to encourage denser development in urban areas. Land costs have skyrocketed and developers have been slow to add housing. So despite the slide in national house prices, in Portland they appreciated by about 8% in the past year.

Portland's policies have been partly responsible for price run-ups in outlying towns like Longview, Wash. (pop. 35,000), says Glenn Crellin, director of the Washington Center for Real Estate Research.

Once a sleepy town, Longview, an hour's drive from Portland, draws home buyers looking for lower prices. (The median price of a house there is $183,000, but $298,000 in Portland.) Prices shot up in Longview by 13.6% in the past year.

With tight supply and high demand, prices could have a tailwind indefinitely.

A trio of economists, Joe Gyourko, Christopher Mayer and Todd Sinai, have argued that persistent growth in cities they dub "superstars" (for example, New York City and San Francisco) is fueled by a limited supply of housing and by a concentration of high-income families who are willing to pay top dollar to live there.

True, both cities have hit bumps in the road in the past, and prices over the past year in the New York metro area rose by only 2.7% while in San Francisco they sank by about 1%. But, Gyourko says, "over the long term they will outstrip the national average."

/from cnn news money/