Home prices 'extremely overvalued' in 53 cities

[Kamikaze1414779018]

USATODAY.com

Home prices 'extremely overvalued' in 53 cities

Tuesday August 16, 11:11 pm ET

Single-family home prices are "extremely overvalued" in 53 cities that make up nearly a third of the overall U.S. housing market, putting them at high risk of price declines, according to a study released today.

The report, by Richard DeKaser, chief economist of National City Corp., examined 299 metro areas accounting for 80% of the U.S. housing market.

DeKaser terms a market extremely overvalued if prices are 30% above where he estimates they should be based on historic price data, area income, mortgage rates and population density - a proxy for land scarcity.

Based on those criteria, Santa Barbara, Calif., is the nation's most out-of-whack market, with houses 69% overpriced. Rounding out the top five: Salinas, Calif.; Naples, Fla.; and Riverside and Merced, Calif.

College Station, Texas, is the most undervalued, priced 19% below where the data suggest it should be. Other inexpensive communities include El Paso, Odessa and Killeen, Texas, and Montgomery, Ala.

The highest-risk markets are in California; Southern Florida; parts of the Boston area; the Long Island, N.Y., counties of Nassau and Suffolk; and Ocean City, N.J.

The big culprit: in 85% of the cities surveyed, home-price gains outpaced income gains during the past year. In Bakersfield, Calif., prices rose 33% while incomes increased 3%. In 29% of areas, prices outpaced income growth by at least 10 percentage points.

Just 2% of markets were in bubbly territory at the start of 2004, vs. 31% in the first quarter of 2005.

Some of the most expensive areas or those with the fastest growth aren't necessarily the most overpriced, according to DeKaser's model. Pricey Honolulu, Hawaii, for example, isn't in the top 53.

DeKaser says his study doesn't mean big corrections are imminent, though he sees evidence the housing market could be at or near a crest.

"For the U.S. as a whole, I expect we're going to have an orderly correction. But that doesn't mean it's going to be equally orderly in all places," DeKaser says.

He says it's rare for property to depreciate, even in overvalued markets, without an economic shock such as rising unemployment. Price corrections might not occur at the same time, and declines in one area could be partly offset by gains elsewhere.

DeKaser's 30% threshold for overvalued markets is based on prices in 63 areas since 1985 that later had housing price declines.

http://biz.yahoo.com/usat/050816/13048929.html

[Guest slamminshaun]

I saw the same article on AOL. It came as no surprise Miami is on there, but Port St. Lucie was number 7 on the list. Yikes!! Just don't expect housing prices to come crashing down like stocks would. A market correction is in order, but that could mean that prices will simply level off and stay leveled off for a longer period of time then they would have had we not experienced the type of growth we had.

[Guest jbit]

The big culprit: in 85% of the cities surveyed, home-price gains outpaced income gains during the past year.

This is the crest of the housing bell curve. The market will have to plateau soon at some point.

Im glad I got in when i did.

[Guest Seb]

this is one of the reasons that we've decided to hold off on buying anything. This article makes me feel better about my decision. Everyone keeps saying prices will not go down, I just find it hard to believe. If interest rates go up (and they definately will) then nobody will be able to afford anything. It seems like common sense that prices will have to correct themselves.

[Guest slamminshaun]

this is one of the reasons that we've decided to hold off on buying anything. This article makes me feel better about my decision. Everyone keeps saying prices will not go down, I just find it hard to believe. If interest rates go up (and they definately will) then nobody will be able to afford anything. It seems like common sense that prices will have to correct themselves.

Indeed, but even God himself (Greenspan) said depreciation is unlikely. Expect the prices to come down maybe a few percentage points short-term, but level off after that. A $350,000 house might correct itself to $335,000, but level off for several years, perhaps even a decade.

Until incomes catch up with these prices, the prices will remain stagnant. Homes will still sell, but the demand will cool off and keep the prices where they are. Florida is a unique market demographically and weather-wise; in addition, we are still far cheaper relative to places like New York, California, etc. Much of the demand in the future will be transplants from places that were even more overpriced then we are.