CHATTANOOGA, Tenn.—The housing boom largely bypassed this midsize city in the Appalachian foothills, which many big developers found too small and too remote to warrant many major investments.

But missing out on the national joy ride turned out to be a double blessing for residents: Not only did the local economy dodge the foreclosure hangover that continues to dog other areas, but local and state officials instead spent the time devoting resources to lure big employers that have helped give the former manufacturing city a...