Housing Markets That Will Be Strongest by 2014

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Matthew Gardner, an economist and principal with Gardner Economics in Seattle, states in a first-quarter report about the western Washington real estate market: "I believe that a bottom is being formed relative to house values and that unless we see a massive flood of distressed houses coming to the market (which is, in my opinion, unlikely), we should see continued stability and ultimately, growth in values in our region."

While Silverdale and Bremerton are doing far better than many other communities, LeMay says construction has slowed so much that the county building department is now open Monday through Thursday—as opposed to every weekday when the market was more active. Any increase in price will simply depend on supply and demand, he says.

would such fast growth be unhealthy?

While most maintain a cautious attitude about the rebound, some predict undersupply in a few years. Celia Chen, a senior director of housing economics at Moody's, recently told SmartMoney.com that such states as Washington, Oregon, New Mexico, and Utah—where supply and demand are now in balance—are most likely to be undersupplied by mid-2012.

Mike Pitts, owner and general manager of Windermere Real Estate in Silverdale, says the 44.7 percent four-year growth forecast for Bremerton-Silverdale is hopeful, but might also be problematic. "I don't know if it's healthy to grow that fast in a short period of time," he says.

These forecasts may sound alarming—if not impossible—to some, but Fiserv's Stiff says: "The risk of another bubble is pretty low." Compared to the rate of appreciation during the housing boom, which was as high as 50 percent annually in some areas, the forecasted rates are reasonable, he says. "It's a reaction to prices being so low, and appreciation will be low after that."

Some hard-hit markets will remain depressed for a while. The outlooks for Miami, Naples, Fla., and Atlantic City, N.J., are the nation's weakest, with prices expected to drop by 14.8 percent, 13.7 percent, and 12.1 percent, respectively, over the next four years.

alternating optimism and pessimism

A year ago, Stiff predicted that the market would reach its trough by the end of 2010. By some measures the recovery is lagging. "What changed that was first time homebuyer tax credit," he says. "It created a temporary increase in prices, so we're expecting a [moderate] double dip."

He expects sales and prices to bump along the bottom as buyers try to jump into the market at the lowest point. This will result in alternating bouts of optimism and pessimism regarding the housing market's recovery. There is added confusion because some areas hit bottom earlier and the timing of corrections is not the same across all regions. The fluctuations will make it difficult to know exactly when the housing market has reached its trough.

Perception is key, LeMay says: Buyers are waiting for prices to reach bottom. In many markets, next year might reveal valuable opportunities.

Click here to see where housing is forecast to rebound the most by 2014.

Wong is a lifestyle and real estate reporter for Bloomberg Businessweek.

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