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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