Easy -- focus on affordability. If you can, choose a house in a market where prices haven't gone through the roof, whether it's Buffalo, N.Y., in the Northeast; Atlanta in the Southeast; Youngstown, Ohio, in the Midwest; San Antonio in the Southwest; Yakima, Wash., in the Northwest; or Riverside, Calif., in the West. You'll get more living space, and you won't have to worry so much that a financial setback such as a layoff will leave you unable to pay the mortgage.
Sure, affordability has always been important. But in boom times, homebuyers were willing to stretch their finances to the limit because they figured the more house they owned, the bigger the gains on it would be. What's more, they reasoned that if they did lose a job and had to downsize, they could sell their house and pay off the mortgage with money to spare.
GOOD INFO. That's no longer a sure thing now that the boom is fizzling. The pace of home sales slowed sharply in October, according to a national survey of brokerage firms by Real Trends, a Littleton (Colo.) real-estate consulting firm. A slowdown in deals is what happens when buyers cut their bids, but sellers aren't yet prepared to lower their asking prices (see BW Online, 11/9/05, Red Alert, or a Wake-Up Call?").
So how do you find an affordable market? One good source of information is the National Association of Realtors' quarterly report on the median sales price of single-family homes in 147 of the nation's biggest metro areas. The report for the third quarter was released on Nov. 15.
The median price is the one that cuts the market in two -- half the homes sold for more than that price and half for less. The cheapest metro area in the Realtors' report was Danville, Ill., where the median price in the third quarter was $72,800 -- a level that's scarcely imaginable to people house-hunting in, say, San Diego, Miami, or Boston. You can scan the Realtors' listings to find relatively inexpensive markets in every part of the country, although the West on the whole is the least affordable region.
LONG-TERM VALUE? Remember, too, that often the cheapest houses lie outside the metro areas entirely. As prices rise, many people are buying in the exurban fringes of big cities -- getting affordable housing in exchange for long commutes. In the New York area, one such frontier is Pike County, in northeastern Pennsylvania across the state of New Jersey. It's a 2-hour drive each way, but for people who can telecommute, it's an option. In greater Los Angeles, the closest thing to a bargain is the fast-growing Inland Empire of Riverside and San Bernardino counties.
Of course, most buyers also hope that the place they buy will hold its value, even if it won't appreciate much in the short term because of a softer national market. One of the best measures of whether a given market will hold its value is a quarterly assessment done jointly by economist forecaster Global Insight and National City, a Cleveland-based bank.
The assessment looks at how prices in 277 markets compare to their historical trends, figuring in such factors as the ratio of local home prices to local incomes. (The measure takes into account the fact that some markets, like Honolulu, tend to have high price-to-income ratios over very long stretches of time, indicating that those ratios are apparently sustainable.)
DRAMATIC VARIATIONS. By the Global Insight/National City measure, the best bargain in the country is College Station, Tex., home of the Texas A&M Aggies. Home prices in College Station are 20% under what history says they should be, given incomes, mortgage rates, and other relevant factors, the analysis says. At the other extreme, Naples, Fla., comes out most overvalued -- at 79% above its trend. Although those numbers have been updated only through the second quarter, they don't tend to vary abruptly from month to month.
Now, let's scan the country to look for bargains. As you'll see, prices vary dramatically region by region. While Springfield, Mass., looks cheap compared to nearby Boston ($218,000 median single-family home price, according to the Realtors, vs. $431,000 in Boston), it's still way pricier than Springfield, Mo. ($122,000) or Springfield, Ill. ($112,000).
NORTHEAST: As elsewhere in the country, the closer you are to the coast, the more you're going to pay for housing. And large metro areas with strong economic growth, like New York and Boston, fetch high prices. By the Realtors' measure, upstate New York is quite cheap, however. The median single-family home price is $104,000 in Buffalo, $120,000 in Rochester, and $118,000 in Syracuse. Albany, the most easterly of the upstate cities, is also the priciest at $193,000. But that's still well shy of metro New York at a median of $534,000.
Bargains are scarce in New England or New Jersey. Pennsylvania still has some inexpensive cities -- headed by Pittsburgh at $123,000. Buffalo, Rochester, Syracuse, and Pittsburgh also look good in the Global Insight/National City rankings, coming up as undervalued at current prices.
SOUTHEAST: For a big city, Atlanta looks pretty affordable in the Realtors measure, at $171,000 for a median single-family home. You could do a little better in Memphis at $145,000. Florida, once a cheap place for Northerners to retire, is no longer a bargain, although Tallahassee on the Florida Panhandle is reasonable at $164,000 for a median home. Undervalued Southeastern and Southern cities, according to Global Insight/National City, include Albany, Ga., Baton Rouge, La., Charlotte, N.C., and Columbus, Ga.
MIDWEST: This is the country's cheapest region, going by the Realtors' median data. Detroit's median price is $172,000, Cleveland is $147,000, St. Louis is $148,000. Even cities that have done relatively well in recent years are reasonably priced: Columbus, Ohio, is $157,000. Among the cities that register as undervalued with Global Insight/National City are Cedar Rapids and Des Moines, Iowa, and Indianapolis, Ind. But Detroit, despite its low prices, is 20% overvalued by this measure.
SOUTHWEST: No doubt about it: If you want a housing bargain in the Southwest, head for the Lone Star State. The housing boom seems to have passed right over Texas. According to the Realtors' data, median prices are $147,000 in Dallas, $145,000 in Houston, and $138,000 in San Antonio. Those are remarkably low for large cities with healthy economies. It's no surprise that these cities also show up alongside College Station, Tex., as substantially undervalued in the Global Insight/National City study. Dallas, for instance, is 13% undervalued.
NORTHWEST: Prices in the Northwest have been driven upward by proximity to California, so great deals are scarce. The median price in Portland, Ore., rose 20% and edged ahead of its sister city in Maine this past year, $254,000 vs. $249,000. And the Seattle area (home of all those Microsoft millionaires) has a $325,000 median.
As elsewhere in the country, the smaller cities have the lowest prices: Yakima, Wash., has a $141,000 median, while Kennewick-Richland, Wash., is at $157,000. One good choice is the charming city of Boise, Idaho, which isn't only cheap -- $148,000 median price -- but is roughly fairly valued in the Global Insight/National City study.
WEST: You'd be hard-pressed to find a bargain anywhere in California, which is probably the most overvalued state in the Union. In the San Francisco metro area, the median price is $722,000. (enough for an entire neighborhood in Danville, Ill.) Even the state's cheapest metro-area housing ain't so cheap -- the Inland Empire east of L.A., at a median price of $387,000.
If you love inexpensive Western living, a good bet is Salt Lake City at a median price of $181,000. By contrast, Denver clocks in at $253,000, Phoenix at $260,000, and Las Vegas at $313,000. Utah also comes out best on the Global Insight/National City value monitor, with Salt Lake, Provo, and Ogden all looking fairly valued or even undervalued at today's prices.
Want to take a house tour? Check out our search for Affordable Homes Under $500,000 region by region.
Coy is BusinessWeek's economics editor in New York