Now that home prices are rising, house hunters and real estate investors are starting to feel a little more comfortable about dipping their toes into the housing market.
But just because home values are rising in some markets doesn't mean real estate isn't a game without risk, especially for those seeking an income stream from their investment. Although rents across the country are rising due to heightened demand, finding renters who will pay a high enough rent to offset an investor's carry costs isn't always a sure thing.
"We're at a point in the real estate cycle where investors and homeowners no longer have to fear falling home prices, though these may still drop by 5 or 6 percent in a few markets," according to Ingo Winzer, president of real-estate data firm Local Market Monitor. "The risk for investors who plan to buy and rent out is that they won't get the returns they're looking for. In some cases they won't get any returns at all because they won't find renters."
While headlines scream that now is the best time to buy, with home prices at or near their bottom and interest rates at historic lows, would-be investors need to take a closer look at their specific markets.
The riskiest markets for real estate investors tend to be where there's been the most overbuilding and where local job prospects haven't seen much recovery. In Florida and California, overbuilding was fueled by Americans buying second homes. After the housing bust, demand for vacation properties collapsed, leaving those areas with a glut of supply that local demand couldn't sop up. Add on an anemic local economy that hasn't seen much in the way of job or population growth and any hopes of new residents settling into the area and buying or renting homes have been dashed.
"There are good investments to be made, but you have to be very careful," Winzer says. "You have a better chance in some markets."
Here's a look at real estate markets that any but the brashest investors should avoid for now:
Source: Local Market Monitor
Just because these markets are perilous now doesn't mean they'll always be. While experts don't expect the environment to change radically over the next few years, broader economic recovery across the nation could cause the winds of fortune to shift in their favor.
"The stars are all aligned," Winzer says. "But the timing matters a lot."
Meg Handley is a reporter for U.S. News & World Report. You can reach her at firstname.lastname@example.org and follow her on Twitter.