Another valuation report

Posted by: Dean Foust on August 25, 2005

There’s yet another report out trying to assess which local housing markets are overvalued, this one by the economists at National City Corp., a Cleveland-based bank. The author of the report, National City chief economist Richard DeKaser, considers a market to be overvalued when prices exceed the statistical norms by 30% (he notes that this was the threshold that preceed the 63 price declines actually observed over the past 20 years.)

His finding: As of the first quarter of 2005, 53 metro areas representing 31% of the total U.S. housing market were “extremely overvalued” and faced “a high risk of future price correction…”

DeKaser's list of overvalued markets contain many of the usual suspects: California, Florida, as well as parts of New York and Boston. Most overvalued is Santa Barbara at +69%, while most undervalued is College Station, Tex. at -19%.

DeKaser's report is worth a look because he went to a lot of effort to determine fair valuations, not only examining "price to income" levels for each market, but also examining houehold density to try to explain some of the rapid increases in prices. He even produces line graphs comparing the actual price experience to his best estimate of what "fair value" was for a particular market. For instance, he shows my city, Atlanta, to be overvalued in the mid-1980s, fair valued around 1990, undervalued in the late 1990s and currently overvalued by just 4%. He provides similar graphs for most major markets in the U.S.

Reader Comments

Frank Pecarich

August 31, 2005 6:27 PM

Finally, a major publication wrote about Harvard's housing study which puts all this bubble talk in it's proper perspective. In a Wall Street Journal article entitled, " What's Eating Home-Builder Stocks" by Scott Patterson he states:

In its recent report, "The State of the Nation's Housing: 2005," researchers at Harvard University's Joint Center for Housing Studies said new-home construction shows no sign of declining in the near future. Harvard's economists found that the inventory of new homes for sale today, measured against the pace of home sales, is near its lowest level ever.
"Given this small backlog, new-home sales would have to retreat by more than a third -- and stay there for a year or more -- to create anywhere near a buyer's market," the study said."

http://online.wsj.com/article/0,,SB112517651740524788,00-search.html?KEYWORDS=Scott+Patterson&COLLECTION=wsjie/archive

If you want to read the entire Harvard study or the Executive Summary, click:
http://www.jchs.harvard.edu/publications/markets/son2005/index.html

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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