Your description sounds a lot like the DC Metro market, at least the Northern Virginia sub-market where I roam.  The only sentence that I would edit, would be regarding significant rent reductions - in general, our rents have stayed steady, but certainly no increases.  The interior sub-markets are still a far cry from cash-flow positive with higher management exceptions(condos, 2-4 units, student housing etc.)  Solid investment deals were relatively plentiful in 1Q09, distress inventory was high and owner occupants were not a significant portion of the transactions. 2Q began to firm and 3Q even more so ... significant inventory reductions and competing bids, particularly in the lower price range.

New transaction volume seems to have slowed, could be seasonal, could be that the tax credit pulled the transaction volume into prior quarters.  Well-priced new listings are very competitive, well above my bid.  If you're willing to go to outer markets, where inventory is still high, say Prince William County -- you can get cash-flow rentals ... but you take on serious tenancy risk with higher unemployment etc. and a higher likelihood of price volatility.

Happy Hunting!

what jimi said is pretty accurate but I'd point out these subtleties

Inventory is tiny in PWC, check out the Virginia MLS website or the novabubblefalloutblog

Prices however are a value over renting.

It's all about the tier and the location here. Lowest-tier 1000 sq ft and under condos and THs in good but not high cachet places are up in price, but still well under rental parity. But as soon as you get to anything "desireable" for the long haul, you'd be lucky to find 10% over rental parity.

PWC and Loudoun however, which have long commutes, do have some very attractive prices, of $100/sq ft or less in all tiers, which may very well constitute a sustainable bottom. 

AstroPhysCat -

Thanks for the insight.

I farm the Fairfax area.  I "toured" parts of PWC in the summer and couldn't get comfortable despite the fact that "it sure looks good on paper".  All real estate is local!

I want to take a look at the Dulles Airport area/Loudoun County side  ... any perspective to add?

That area is kind of the tech corridor, so there are people for whom the commute is short, and thus who are willing to pay more. So, unless you also work in the tech corridor it may not work out as well for you. But price per square foot is lower and average square footage in a home is a lot larger than FFX.

You gotta live somewhere you want to live... so if you drive around and it just doesn't feel like home, then you can't buy there.

Jimi,

How do you go about determining "tenancy risk" in a methodical manner?

I see houses in all parts of DC that would be cash-flow positive rentals if they could be filled at "market rates" with minimal vacancy. But I honestly don't know how to determine if a particular property would be filled at a market rate or not.

pea -

Good question.  First, tenancy risk is the risk of vacancy and/or non-payment.

To me, tenancy risk is strongly correlated with market risk.  So, sub-markets with low unemployment and  low rental vacancy are the primary drivers.  After that, it comes down factors like transportation options, proximity to shopping etc.

What other factors should we consider in order to be more "methodical"?