A study released last week by Global Insight and National City Corporation
titled House Prices in America concludes that in 71 metropolitan areas
representing 39 percent of the total value of single family homes in the country
those homes were extremely overvalued in the first quarter
of 2006. This is an increase from the fourth quarter of 2005 when 64 markets
representing 36 percent of national home value earned this designation. It is
even more striking to compare the most recent data to the first quarter of 2004
when this same study deemed that overvaluation was insignificant and only three
metropolitan areas and only 1 percent of all single family home values were
thought to be out of line with reality. The study's designers consider that
areas where home prices are in excess of 34 percent over what they determine
to be real prices are excessively overvalued.
The study examined 317 metropolitan areas containing 84 percent of single family
house values in the United States. Eighteen metropolitan areas were recently
added to the 299 for which data had been accumulated since 1985. The study determines
what house prices should be by taking into account not only house prices and
interest rates but also population density, household incomes, and any historical
premiums or discounts exhibited by metropolitan areas over time. These "statistically
normal house values" are then compared to actual prices to determine the extent
of over- or under-valuation.
The study quotes the most recent Office of Federal Housing Enterprise Oversight
(OFHEO) same-house price report as stating that single-family house prices appreciated
at a 7.3 percent seasonally adjusted annual rate during the first quarter of
this year. This continues a pattern of steady erosion in increases since the
second quarter of 2005 when appreciation peaked at 12.1 percent. The current
rate of home price increases, while strong by historical standards,
is the weakest since the third quarter of 2003. In other words, prices are still
going up, just not as fast as they have over the last few years.
The Global/National City report states that this rate of appreciation is actually
highest in the areas which are already the most overvalued. Of the 50 metropolitan
areas most overvalued during the recent quarter, the average pace of appreciation
was 10.1 percent while the 50 most under-valued areas averaged an increase of
2.7 percent. In other words, "the imbalance in prices is exacerbating."
However, the study concludes that "quarter-to-quarter price appreciation is
slowing in most metro areas, and is nearly flat in San Diego and Boston."
Over-valuation is, no surprise here, most notable in Florida
and California. Of the 71 metropolitan areas considered excessively
over-valued, 17 are in Florida and 26 in California. Oregon, Washington State,
New York, and Arizona also have multiple metropolitan areas on the list. Interestingly,
as recently as the first quarter of 2003 18 of the top 71 areas were considered
to be undervalued by the study.
Holding the dubious honor - by a huge margin - of being the most overvalued
area is Naples, Florida which, with an average price of $383,000
was considered to be over-valued by 102.6 percent. As a measure of how rapidly
Naples' prices have increased, in the first quarter of 2002 it was considered
only 1.9 percent overvalued and one year ago 53.3 percent. In second place is
Salinas, California with an average price of $608,600 - 79.1 percent higher
than the study designers consider to be the real value or homes in the area.
Salinas actually decreased since the previous quarter when the average value
was $614,100, 81.4 percent over-value. Following the 71 most overvalued areas
are 45 others with over-values exceeding 20 percent.
At the other end of the scale, the most undervalued area is College Station-Bryan,
Texas with an average price of $94,200, considered 23.7 percent under-valued,
followed closely by Dallas, Texas and Fort Worth, Texas, both under-valued by
slightly over 18 percent, and five other generally large Texas cities such as
Houston, El Paso, and Midland. Texas metropolitan areas, in fact, represent
20 of the bottom 50 on the list. Alabama, Oklahoma, Louisiana, and Indiana also
have multiple SMSAs on the list.
The study lists 66 instances of price corrections of 10 percent or more over
the last 20 years, most notably a 39 percent nose-dive in Lafayette, Louisiana
starting in the first quarter of 1985. The median correction was 17 percent
and half of those areas suffering these corrections were overvalued by 34 percent
or more prior to the downturn. The median period of the correction was 14 quarters.
The more severe the overvaluation, the shorter the duration of the correction
tended to be but the larger the decline in price.
National City Corporation is one of the nation's largest financial
holding companies. Its core businesses include commercial and retail banking,
mortgage financing and servicing, consumer finance and asset management. Global
Insight is a forecasting company providing economic, financial, and political
data acquisition and analysis in over 200 countries and 170 industries.
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