In optimizing the relationship of risk and return, many would argue there’s not a better investment right now than U.S. residential real estate, especially in various geographic regions of the country. Aside from directly investing in U.S. real estate, some other strong investment options are homebuilders such as KB Homes (KBH), Lennar (LEN), Toll Brothers (TOL), and Taylor Morrison (TMHC). Silver Bay (SBY) and Blackstone (BX) have also been extremely active in acquiring distressed real estate in various markets and leasing the properties. Last, but not least, one could also go the route of exchange traded funds with iShares Dow Jones US Real Estate ETF (IYR) and the SPDR Homebuilders ETF (XHB).

While the risk / return of U.S. real estate looks extremely attractive right now, the resurgence of residential real estate in the U.S. has been somewhat bifurcated. By applying four filters, this article identifies the best regions in the country for potential appreciation in home prices.

There are many variables that can impact real estate and prices, but one of the more significant variables that has impacted the recent resurgence of U.S. real estate is how various states conduct their foreclosure process. All U.S. states subscribe to either “Title Theory” or “Lien Theory” in how they go about the foreclosure process. “Title Theory” states basically process foreclosures in a more expedited manner using non-judicial proceedings, while “Lien Theory” states tend to have a much more protracted foreclosure process using judicial proceedings. With the Great Recession resulting in so many foreclosures across the country, “Title Theory” states have been able to process these foreclosures much faster than “Lien Theory” states. This has essentially allowed “Title Theory” states to clear their delinquent loans and reduce “shadow” inventory to an insignificant supply. As a function of the free market in these states, supply has been significantly reduced to a point well below equilibrium and thus the basic economic fundamentals of supply & demand have kicked in and prices have and continue to move up. Consequently, most “Lien Theory” states have not been able to process their foreclosures expediently, and hence they still have many delinquent loans and a higher potential for “shadow” inventory. Lender Processing Services provides a very thorough analysis of these differences as well as a state by state analysis, here’s their most recent report.