A new statistical study on real estate cycles suggests that smart investors in 2006 should consider markets that were bypassed by the housing price boom of 2000-2005, and that have affordable home costs but are experiencing solid employment growth.

The study, conducted by Dr. Christopher Cagan, research and analytics director for First American Real Estate Solutions, an affiliate of giant First American Corp., classifies metropolitan housing markets into several types:

• "Linear" markets, where prices over time tend to move up slowly -- a few percentage points a year -- and have slow, steady economic growth. Examples include Atlanta, Nashville, Wichita, St. Louis and Indianapolis.

• "Cyclic" markets that run through boom and correction cycles of 10 to 15 year durations, where prices rise rapidly, and then cool or even retreat. Most of these are located along the coasts and have little land available for new construction. Examples include San Francisco Bay, southern California in general, Miami, Houston and New York City.

• "Hybrid" markets that sometimes behave in a slow-but-steady growth "linear" pattern, but occasionally go into faster growth cyclical behavior. Cagan considers Chicago, Seattle and Dallas to be in this category.

• "Catch on" markets that traditionally behaved in a slow-growth linear manner, but that more recently have "experienced a strong move in prices up or down, in a departure from their long-term character." Cagan includes Las Vegas, Phoenix and Detroit in this category.

The study used publicly-available housing price data from 1988 to 2005, and applied proprietary analytical modeling techniques to classify metropolitan areas. The study offers no specific investment advice, but in an executive summary, Cagan comments that "markets in areas where prices have not yet risen rapidly," and where "affordability and job availability are high and economic conditions are strong may offer the best opportunities for investment during 2006."

By implication, "cyclic" markets that have peaked out may offer few opportunities -- at least for the short term. Those markets are easy to spot, even from daily headlines: Most of the coastal California areas, along with Washington D.C., Florida, New York and New England are in slowdown mode at the moment. And according to Dr. Cagan's analysis, are poised for further slowdowns.

Cagan focuses on Texas metro areas -- Amarillo, Austin, Beaumont, Corpus Christi, Dallas, El Paso, Houston and San Antonio -- as "linear" markets that may well be poised for growth in real estate values. Texas is benefiting economically from high energy costs, and with its moderate house prices and generally attractive business climate, could well attract investors who see their opportunities restricted in some of the high-cost, highly-cyclical East and West coast markets.

Cagan lists "linear" markets beyond Texas and notes that they have not yet "tested their affordability limits" -- that is, home prices still have plenty of room to grow if local economies expand -- and are "not likely to be vulnerable to a downturn of magnitude."

Besides the major moderate-cost, moderate-risk areas mentioned above, Cagan also lists following among linear markets where investors might take a look this year: Denver, Davenport, DesMoines, Baton Rouge, Kansas City, Charlotte, Cincinnati, Oklahoma City, Pittsburgh, Memphis and Milwaukee.

(You can access the full report here)

Published: May 22, 2006

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.