Editor's Note: This article is republished with permission from Inman News. View original article here.

While national home prices and sales may not recover to their historical levels until 2013 at the earliest, some local housing markets always outperform others in any given year.

In this second annual report (see last year's report: Top 10 Markets to Watch in 2011), Inman News examined housing, economic, and demographic data for metropolitan areas nationwide to identify 10 housing markets to watch in 2012.

These markets are showing signs of strength in several key metrics, including above-average price appreciation, a flourishing job market, a high rate of sales in proportion to population, a high level of home affordability, low foreclosure activity, a below-average share of distressed sales, a low vacancy rate, and other characteristics indicating a healthy housing market.

While real estate markets in the Midwest and Northeast made up the majority of markets on last year's list of 10 markets to watch, this year the Midwest and the South dominated. Two Northeastern markets, both in New York state, also made the list; and no markets in Western states are on the list.

The 10 markets are, in order: Raleigh-Cary, N.C.; Wichita, Kan.; Rochester, N.Y.; Des Moines-West Des Moines, Iowa; Chattanooga, Tenn.-Ga.; Peoria, Ill.; Amarillo, Texas; Binghamton, N.Y.; Waterloo-Cedar Falls, Iowa; and Bloomington-Normal, Ill. The Des Moines and Bloomington-Normal metros are on the list for the second year in a row.

Nationwide, unemployment is high, though trending down; the median price of an existing home fell over 4% in 2011; and existing-home sales rose a modest 1.7% last year, according to the National Association of Realtors.

Stan Humphries, chief economist for Zillow, said 2012 will be a "transitional year" in the housing recovery, with an improvement in home sales and prices anticipated to fall to a long-awaited "bottom."

Zillow identified some markets that are "undervalued" on a historical basis in a chart provided for this report, and Inman News reached out to a range of other real estate research and information companies for their insight on those real estate markets expected to outperform others in the year ahead. Those companies' findings were not considered in the review and selection process of the top 10 markets featured in this report.

"While home values are expected to fall further (another 2% to 4%) in 2012 with a definitive bottom probably a year away, encouraging precursors to a true stabilization of home values are falling into place as the new year begins," Humphries said in a forecast on Jan. 24.

"Home sales will show a more consistent upward trend this year, slowly reducing the amount of vacant housing inventory. This increased demand will eventually start to put a floor under home values later this year."

U.S. foreclosure activity hit its lowest level since 2007 last year, though experts largely expect it to ramp up this year, putting downward pressure on home prices.

"There were strong signs in the second half of 2011 that lenders are finally beginning to push through some of the delayed foreclosures in select local markets. We expect that trend to continue this year, boosting foreclosure activity for 2012 higher than it was in 2011, though still below the peak of 2010," said Brandon Moore, CEO of RealtyTrac, in the company's year-end foreclosure report. RealtyTrac also provided a chart for this report.

To compile the list of 10 markets to watch this year, Inman News looked for markets with above-average median sales price growth, a low unemployment rate, a high rate of sales per population, high affordability, low and falling foreclosure activity, a low share of distressed sales, above-average projected job growth, median household income growth, low and falling vacancy rates, growth in the number of building permits issued, above-average population growth, high projected population growth, and a rise in in-migration from other states.

While no markets on the list fulfilled all of these ideal economic characteristics, they did meet most of them.

Contrary to last year's list, in which most of the resulting markets had populations under 250,000, half of the metros on this year's list had populations above 500,000. This may be partially a result of only considering metros with a population of 150,000 or above, while last year's list did not limit the list by population size.

Among the findings in this report:

  • Three of the 10 markets on this list are state capitals, and both Illinois markets benefit from proximity to that state's capital, Springfield.
  • Four of the markets: Bloomington-Normal and Peoria in Illinois as well as Des Moines-West Des Moines and Waterloo-Cedar Falls in Iowa, are no more than 300 or so miles from each other.
  • Nine of 10 markets had median sales prices below the national median in the third quarter of 2011.
  • Where affordability rankings were available, the markets on the list had no less than 73.6% of homes affordable to those households earning the area's median income in the third quarter.
  • All had unemployment, foreclosure, and vacancy rates lower than the national average. None of the markets had unemployment rates higher than 7.9 percent. All had lower shares of distressed sales than the national average.
  • Only two of the markets had populations above 1 million, and three had populations above 500,000. The remainder had populations below that figure, but above a minimum 150,000.
  • As in last year's report, jobs in the public sector as well as the health care industry were major employers in most markets. This year, however, nine out of 10 markets also counted manufacturing companies among primary employers. Technology companies, energy providers, and universities also boosted many markets.

The 10 markets are ranked according to population, sales volume, and median sales price appreciation. Population was weighted most heavily in the rankings, followed by sales volume in proportion to population, and rate of price appreciation. © 2012 Inman News. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without the prior written permission of Inman News.

Learn more about markets featured in this article: Raleigh, NC, Wichita, KS, Rochester, NY, Chattanooga, TN, Des Moines, IA, Atlanta, GA, Peoria, IL.