America's Top Long Term Real Estate bets

These 10 markets are the least likely to overheat and bust and the most likely to have vibrant economies moving forward.

Drive along Interstate 80, just outside the city of Sacramento, Calif., and scores of gated and planned communities await. Only they're not what developers envisioned. Sidewalks are empty; homes are unoccupied.

Blame the heady days of the real estate boom. Easy-to-acquire mortgages, plenty of open land and generous zoning provided new homes to scores of buyers. Between 2000 and 2005, Sacramento-area builders doubled production.

But as prices dropped and demand dried up, builders cut back. This year, there are expected to be 6,140 new constructions in the Sacramento metro area. That's down from 20,370 in 2005, according to the National Association of Home Builders (NAHB). Median prices are now $212,000, down from $375,000 in 2005. For many residents, this is old news. Sacramento home builders and buyers engaged in the same behavior leading up to, and following, the Savings & Loan crisis. That's when construction doubled and then quartered once prices fell. Indeed, it's a market prone to booms and busts, which not a good sign for long-term investment.

That's not the case in Seattle, New York or Philadelphia, which are far less volatile when it comes to building and vacancy spikes in tough economic times. There's just less room to grow and few laws that make it easy to do so. In these markets, building activity doesn't rise as hastily during national booms, and, as a result, doesn't crash as dramatically during slowdowns (based on historical volatility and current market conditions).

Behind the Numbers

Forbes.com evaluated the 40 largest Census-defined metro areas using the last 25 years of data from NAHB. We calculated volatility in supply (new construction) and demand (vacancy rates). Our measure tracks the degree of difference between how specific housing markets expand or contract in relation to the national market. If, for example, a city's building rate grows by 5%, versus 1% nationally, there's usually a similar pattern on the way down. That may be good for a flipper in the right place at the right time, but it's not good for long-term investing. The top 10 cities on our list are those that grew in value, but avoided large swings in times of excess and stress.

No surprise, metro areas in California, like San Diego, Los Angeles and Sacramento--some of the nation's most noteworthy boom-bust markets--performed poorly by this measure. Folks from all over the country move to California in boom periods, given its diversified industry, which includes everything from oil to entertainment. This is reflected in housing construction rates, which rank near the top in years when the stock market rises and jobs are plenty. Problem is, they take off when the party's over, leaving mass unsold inventory, something home builders have yet to fully account for even though it's a pattern dating to the 1980s.

"Migration in California tends to be very elastic," says Mark Zandi, chief economist of Moody's Economy.com. "People move there quickly when the economy is good and leave when it's not."

The only exception was San Francisco, which is so geographically constrained that it's difficult to overbuild there.

It's this kind of constraint that helps many East Coast cities resist volatility. Less room to build protects these cities from the crippling oversupply that's hurting places like Phoenix or Las Vegas.

"Along the eastern seaboard, prices got pretty high, but it wasn't followed by crazy levels of production because these are old, built-up cities," says Denk of the last boom. "Prices are going to come down, and that's going to keep prices weak, but they're not struggling with over supply."

New York, for example, has the lowest level of construction relative to its population, which constrains supply and vacancy, allowing the market to correct more quickly.

"There's no new inventory in the pipeline for 2009," says Jonathan Miller, president of Miller Samuel, a Manhattan residential appraisal firm. He says that will help existing buildings move properties and soften the real estate downturn in New York.

Job-growth forecasts also play a role in determining a region's long-term strength. To gauge this measure, we looked at predictions through 2017 from Moody's Economy.com. These are based on Bureau of Labor Statistics (BLS) data of market sectors (manufacturing, bad; biotech, good, for example) and its own analysis of each area's business costs and growth prospects. So, while San Antonio and Atlanta have virtually no zoning restrictions and allow liberal home construction during good times, they've been consistent leaders in job creation and Moody's rates them as second and sixth, respectively, for job growth through 2017. This leads to positive expected-absorption rates as job seekers head there.

Job-growth and construction rates are important determinants of an area's future health. That's because they have historically governed housing prices since they govern supply and demand. However, during the housing boom, the national mortgage market helped inflate cities beyond their economic underpinnings. Expect to see job and business growth return as engines of property price gains.

"Housing markets are supposed to be local, local, local, but the boom was pretty much national, and a lot of housing markets decoupled from local economic drivers," says Robert Denk, an economist with the NAHB. "The current correction will change that."

Of course, that's not to call a bottom or suggest you rush to buy real estate tomorrow.

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Washington, D.C.

Washington D.C., remains on the mat--prices are down 24%, and the exurbs are packed with foreclosures. But even so, the D.C. metro has the nation's lowest rate of unemployment, according to the BLS. Growth in government jobs is stable, and Northern Virginia particularly has been one of the nation's fastest growing business centers, helping lift the commonwealth to the title of Best State for Business.

Prices are likely to continue falling nationwide for at least another year as the mortgage and housing markets shake out their hangovers. And while it might be some time before those who bought at the market's peak recoup their costs, the cities on our list possess the strongest fundamentals for when the market settles.

America's Best Long-Term Housing Bets

1. Seattle, Wash.
Job-growth projections 2008-2017: 1.5%

Seattle's peak building period in the 1980s run-up was in the second quarter of 1986. The Savings & Loan crisis didn't fully halt building activity until the fourth quarter of 1992. What lands it in the first position on this list is the combination of strong job growth with a building cycle that hasn't run in high excess of demand and, in part, its constrained geography. Especially compared to cities on the West Coast, Seattle has historically not overheated in boom times.

2. Washington, D.C.
Job-growth projections 2008-2017: 0.9%

Building activity hit high points in the second quarter of 1986 and the first quarter of 2006. In the most recent bust, D.C.'s exurbs have been particularly hard hit. Even so, the region has the lowest rate of unemployment in the country, according to the Bureau of Labor Statistics. Despite recent building exuberance, it has the second lowest demand volatility in the country, meaning that vacancies have historically been very low.

3. San Antonio, Texas
Job-growth projections 2008-2017: 2.0%

There may be little zoning in Texas, and the state may be a model of sprawl (read: lots of homes built in good times), but San Antonio has fared better than its Lone Star brethren throughout the peaks and valleys of the last 20 years. Volatility in home building and vacancy were in the middle of the pack nationally, while the metro area's job-growth figures have been national leaders.

4. Minneapolis, Minn.
Job-growth projections 2008-2017: 1.1%

Minneapolis has not experienced the same sort of booms seen elsewhere. In the most recent run-up, building activity peaked in the third quarter of 2004; this will help the market in the short term as it means less new inventory dragging down prices. The city's real strength is its economy, which has less of a manufacturing base than most Midwestern cities and hosts a handful of multinational corporations.

5. New York, N.Y.
Job-growth projections 2008-2017: 0.6%

Part of why New York City prices are so expensive is because the cost to build is one of the highest in the country. There's also no open land to be found. While that hurts affordability, it stems overbuilding relative to demand. Historically, the New York metro area has the lowest vacancy fluctuations of any city in the country. Unless a new island is added, expect that to continue.

6. St. Louis, Mo.

Job-growth projections 2008-2017: 0.3%

St. Louis is far from an economic juggernaut. But what places the city in this position, and makes up for the sluggish Job-growth figures, are a ranking of fifth in vacancy volatility and 13th in building volatility. Builders and city planners have done a better job than those in most cities of resisting overexpansion.

7. Philadelphia, Pa.

Job-growth projections 2008-2017: 0.2%

Like many cities on the eastern seaboard, Philadelphia's density and lack of space makes it less prone to overbuilding. Philly's suburbs, especially those on the main line, are carefully zoned and have resisted development. That means a tight supply. Because there isn't an excess of new homes, Philadelphia has the nation's third lowest vacancy volatility.

8. Cincinnati, Ohio

Job-growth projections 2008-2017: 0.5%

Cincinnati hasn't been as negatively affected by downturns in manufacturing as have Cleveland, Toledo and Youngstown. The Queen City may not be poised for explosive growth over the next decade, but its ranks14th for vacancy volatility and ninth for building volatility. Both are signs that the market has remained reasonably stable throughout strong and tough economic times.

9. Portland, Ore.

Job-growth projections 2008-2017: 1%

Portland's conservative building patterns and vacancy fluctuation, which rank 17th and 19th, respectively, help make for a steady market. It won't likely ever be the sort of market where flippers can make huge profits, but this kind of stability is a bonus on downtimes.

10. Atlanta, Ga.

Job-growth projections 2008-2017: 2%

Overbuilt Atlanta is currently in the middle of a bust. Building peaked in the first quarter of 2006 but was not met with demand. However, the city has been one of the biggest drivers of Southeast job growth. While Atlanta's lack of zoning means high construction rates, strong in-migration and job growth is expected to cover it.