Bubble watch: 10 cities where prices will deflate

From Las Vegas to Edison, N.J., these bubble busters are facing everything from a lack of new building and job loss, to price appreciation that simply can't be maintained.By Pat Curry, Bankrate.com

Las Vegas: What goes up must come down. Fortune lists Las Vegas dead last in its list of 100 metro markets for housing appreciation in the next two years, predicting a two-year combined decrease in housing values of nearly 13%. Local Market Monitor reported a 33% increase in appreciation between 2003 and 2004, and then a 14% increase by the third quarter of 2005, evidence that prices have begun to cool. "Las Vegas is a very interesting market," Winzer says. "A lot of people moved in, but construction has kept up with the pace. For a long time until recently, I didn't consider it an overpriced market. I don't think the price increases will last. There's really not an inability to produce new homes out there if there is a demand for it."

Sacramento, Calif.: We're not quite sure what Sacramento ever did to anyone, but it showed up on just about everyone's list of has-been markets. Winzer's Local Home Value Ratings rates the market as 59% overvalued and Burns Housing Cycle Barometer also lists it as overpriced. "Sacramento, we think, has topped out," says Gollis of The Concord Group. "There is just so much (housing construction) in the pipeline. It's a steady-as-she goes market and has always had consistent growth, but we think the land market has gotten ahead of itself."

Phoenix: The bigger they are, the harder they fall, and Phoenix is the largest housing market in the country in terms of new construction. It's been running at 65,000 new units per year, with housing appreciation increasing at rates of nearly 30% per year. "You can't sustain 30% increases a year for very long," Winzer says. "Of all the 100 markets we review, we think if you're an investor in Phoenix, you should sell, because vacancy rates are already pretty high." Gollis says his firm has been studying the market carefully and doesn't like what it sees. "It's had an incredibly unusual amount of growth," he says. "The land market has accelerated dramatically and the lot price as percentage of the home price has gone up significantly. We have some concerns about going long in Phoenix."

Boston: This one is in Winzer's backyard, his firm is based in Wellesley, Mass., so he sees what is happening there every day. "Until about a year ago, homes would go on sale and be gone in a week," he says. "Now they're sitting on the market for a year." He doesn't see the prices dropping rapidly here -- or in any market, for that matter -- because while real estate prices escalate rapidly, they drop slowly. "In markets that are well-overpriced, prices don't really fall because people just won't sell," he says. "The adjustment mechanism is skewed by people's emotions getting involved. People will grit their teeth and hang on as long as they can to get the price they want." They might not be able to hang on for long. Burns ranks Boston fourth on his list of markets likely looking at a bubble; Winzer's analysis indicates the market is 33% overvalued.

Los Angeles: The City of Angels has been described as the poster child for how a lack of new housing near employment centers can hurt an economy. Affordable housing has been an issue in the market for years. It's ranked as one of the least affordable places in the country to live, with housing prices consuming 91% of income, according to statistics from John Burns Real Estate Consulting. The median price of an existing single-family home was $568,000 at the end of 2005, the National Association of Realtors reports. Plus, job growth is virtually flat. Together, it's cause for real estate market consultant Gollis to predict that the prices for California coastal markets are topping out in single-family homes. Fortune predicts a drop-off of nearly 8% in housing prices in the next two years, putting it in 95th out of 100 markets for growth.

Naples, Fla.: At 72%, Naples is No. 2 on Local Market Monitor's list of overvalued markets in the country (Santa Barbara-Santa Maria, Calif., is No. 1 at 86% overvalued). In actual pricing, it outpaces other Florida markets by a good $100,000 margin. Plus, there is an abundance of more affordably priced options for buyers within a short driving distance. It is no understatement that entire cities are being built nearby. "The markets that are the most overvalued are the ones at greatest risk of a substantial correction," Winzer says. "Naples is at the top of that."

Miami/Fort Lauderdale, Fla.: Rapid, dramatic price increases over the past two years -- and an extraordinary amount of new products being built in the condo market -- is the reason many real estate market analysts think this market just can't sustain much more in terms of price increases. The market probably won't decline, they say, because the region remains attractive to South American and European buyers, but there just isn't sufficient demand to absorb the entire available inventory. Plus, according to NAR research, affordability is an issue in the market, calling the home price-to-income ratio "unfavorable."

Edison and Newark, N.J.: As far as the real estate analysts are concerned, these two cities have pretty big targets on them for a decline in appreciation. John Burns Real Estate Consulting ranks Edison seventh -- ahead of Los Angeles, Miami and Washington, D.C. -- as a market facing a potential housing bubble. It gives Newark an F on its local market grading scale, attributable largely to the loss of several thousand jobs and the highest housing-cost-to-income percentage in the state's metro markets. Fortune predicts a very modest 1.2% gain in housing appreciation this year for Edison that would be wiped out in 2007 by a loss of 2.9%. The situation is similar in Newark, where Fortune suggests a 1.5% increase this year will be canceled out by a 1.8% loss the following year.

Nassau/Suffolk, N.Y.: Otherwise known as Long Island, this market is No. 2 in the country on real estate consultant John Burns' list of locations facing a potential housing bubble. (Modesto, Calif., has the top spot.) Similarly, Fortune predicts a loss of about 6% in housing values over the next two years.