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You know the joke. What three things matter most in real estate. Location, location, location.

What was most striking about the boom of the last decade (beyond the financial shenanigans) is that this old adage was forgotten, or ignored. Homes were built far from employment centers, subsidized by local governments that extended highways or freeways within some miles of the new developments. Prices skyrocketed in the highest-crime neighborhoods, as liar loans were sold to people who tapped their homes like ATMs.

Most of these homes went underwater. Some were torn down. Neighborhoods inside and outside major cities remain devastated by foreclosures and the attendant human misery. Every company in the main homebuilding ETF (NYSEARCA:XHB) has horror stories.

But not like that where I live. Infill construction has resumed in areas like Decatur, Ga., places that are near employment centers, that have decent schools and a good reputation. I had an appraiser in recently who said my home (across the street from Decatur in a suburb of it called Atlanta) is worth more now than it ever was.

What's happening? High fuel prices have renewed the "explosion inward," the move of people from distant suburbs into neighborhoods closer to town, closer to where they work. Construction and permitting costs are higher here, but profits can still be had.

Urban pioneering, a trend I've followed since moving into an all-minority neighborhood in 1983, is a careful, accretive process. Lines of major highways or of jurisdictions are crossed grudgingly. Those who move first take big risks, but can gain big rewards down the road. This is true for families, for merchants, and for real estate developers.

Right now companies that produced houses as manufactured goods are losing out to smaller companies that know neighborhoods, that adapt to new buyers and requirements. But that's temporary. Over time the bigger companies will learn the new game, perhaps by buying some of the small firms that are already practiced at it. And once they learn the game they'll scale it.

It will take a few years, and it won't be quite as profitable as knocking down 100 acres of trees outside a city and filling the resulting shoddy with liar loans. But it will be a good business. Once it's established XBH will be a buy. But I'd wait until 2013 and use the intervening time to study the current players, then play the one that best understands the new game rather than playing the field.

Source: What Matters In Real Estate Matters More Than Ever