While it might be difficult to find good news coming out of the latest housing market data, there is a silver lining to the housing downturn. Affordability is at a historic high, and there are lots of opportunities out there for average homebuyers and investors alike.

Here at Zillow, our extensive real estate data allows us to take deep looks into housing markets across the country. Zillow’s research team decided to put together a list of the best places in the country to invest in 2011. To be clear, we’re not talking about people looking for a quick flip, but sophisticated investors who are interested in making a long-term investment in properties that will generate rental income. These types of investors usually expect modest value appreciation, so are focused more on regular positive cash flow.

We looked at four factors in individual markets across the nation:

  • Price-to-income ratio: We looked at the relationship between local incomes and home values over time, pinpointed the historic norm, and compared today’s price-to-income ratio. Places where home values are currently above that historic norm got high marks, because that suggests property values may have over-corrected in the housing downturn, so this year would be a good time to buy.
  • Foreclosures: We wanted places where foreclosure rates were falling, which means the local market is likely improving. But foreclosures are attractive to many investors, so we wanted to make sure there is still an ample supply available.
  • Price-to-rent ratio: We looked for places where the difference between the annual cost of renting or buying was small. That can be a double-edged sword for investors, since this means that current purchase prices are attractive now, but that rents could fall in the future. However, rents may be high now relative to the purchase price, so the property might generate income quickly.
  • Home value appreciation: We wanted to see the Zillow Home Value Index (which measures the median value of all homes in an area) increasing, since it’s more attractive for investors to buy in a relatively strong real estate market.

The best place to invest: The hard-hit metropolitan statistical area of Merced, CA. In Merced, home values are rising again after correcting substantially during the downturn. Foreclosures are falling, but sales of previously foreclosed homes made up 53% of all sales in October, so there are plenty of choices for investors. Below is our full list of 10  metropolitan statistical areas that ranked highest for investors.

> See Merced real estate
> See Modesto real estate
> See Madera real estate
> See Stockton real estate
> See Las Vegas real estate
> See Salinas real estate
> See El Centro real estate
> See Rochester real estate
> See Pittsburgh real estate
> See Vallejo real estate

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  • MH for Movoto

    all of these sound like good investments . . . . will be interesting to see if any of these spots become up-and-coming cities in the next few years.

  • Las Vegas Real Estate Agent Paul

    Your Price to Income and Price to Rent criteria is spot on… The same reasons why it was time to sell in Las Vegas in 2005.

    Rents have dropped in Las Vegas but there is demand from tenants if you know what to buy in the first place.

  • Calypso Bay

    Investing off shore is becoming more and more like a good idea. Perhaps people should be looking into it. California is definitely the place to be!

  • John Lee, Honolulu, HI.

    Why would anyone want to buy in California right now. Attention Zillow: The cost of property tax and other taxes is about to go through the roof. Toot! You should consider the cost of ownership when compiling your rankings.

    This makes (in my mind) LV the best. No taxes!
    I bought a brand new home, not a condo, a 3/3 with Granite, dual AC, everything… for less then you could buy the crapiest, oldest, run-down POS in Hawaii, where I live. Paid cash, found a great tenant on Zillow!!! and I’m actualy makes a profit!

    And how could Honolulu, Hawaii, not be on the “worst” list.. good luck trying to buy right now! Huge run-up and a moderate down side. No one can buy anything here right now.
    Also, I own rentals and barely break even due to the high initial cost, taxes and huricane insurance.

    …So, the best part of owning in LV: I get to write off all the vacations to Nevada, and I intend to buy one more each time I come for a couple more years.

    Maybe I’ll own enough to retire there some day.


  • Jeff

    John Lee, you might want to check your facts…Nevada most certainly does charge property tax. It’s about the same percentage as CA’s. Of course the properties in NV are a third of the price, so that helps.

  • Alfonso

    Like to know if you considered Puerto Rico, USA in your study?
    The combination of Puerto Rico been part of the USA, limited lands, beautiful beaches, highly resistant (hurricane, tornadoes and fire) reinforced concrete structures and low and steady property taxes makes Palmas del Mar and many other developments in Puerto Rico a special place to live and/or invest in real estate.

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  • David Tobey,

    Fascinated to see Salinas, CA at #6 on that list. If you happen to rent to a large family from Oklahoma, be kind to them. They’ve got troubles enough.

  • Ben Balsbaugh

    If you are looking to buy and hold, you can certainly get great cash flow in Modesto today.

  • Scentsy Germany

    I live in the Seattle area and was debating whether to invest this year. You just helped in my decision making.

  • Ray

    Seems like California is the place to be…. I’m surprised Portland is on the bottom though.

  • weebo

    The newest UC is going to make Merced HUGE in the next ten to fifteen years. Buy up the property now and be sure to rent it to nice college students like me :)

  • KC

    The city of Vallejo declared bankruptcy in 2008. Perhaps this is also the reason for the “bargain” prices but would you want to live in a bankrupt city or possibly a state (CA) for that matter? Don’t get me wrong — I love California — I just can’t justify living there.

  • Paul in Las Vegas

    I’ll stick to Las Vegas… California was just approved to use $2 Billion of U.S. taxpayer dollars to pay the mortgages of low to moderate income families…

    End result — artificial home values.

    Besides that.. much easier to boot out non-paying tenants in Las Vegas then it is in California.

  • Mohammad Abdul-Aziz

    I am looking forward in viewing forecloser homes in Phoenix, Arizona. What is the latest information on buying in Arizona? What are the pro’s and ocn’s. Thank you for any advice.

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