Even as the housing crisis drags down values, home prices in eight markets remain significantly higher than statistical models suggest they should be—putting them at risk for steep declines, according to a report issued today by Global Insight and National City Corp.
Overvalued Markets (Prices in thousands)
|Metro area||Median home prices||Overvaluation*|
|1Q 2007||1Q 2008||1Q 2008|
|Atlantic City, NJ||$273.1||$262.8||55.6%|
|Ocean City, NJ||$327.9||$321.7||39.5%|
|St George, UT||$257.8||$240.6||35.2%|
*The researchers define overvaluation as the percentage difference between a market's median home price and what their statistical models suggest the price should be. Their approach "considers not only house prices and interest rates, but household incomes, population densities, and any historical premiums or discounts metropolitan areas have exhibited over time."
Because these eight markets are so overvalued, they "present a risk of substantial price declines (10 percent or greater) going forward," the researchers say in the report.
In the nation as a whole, however, overvaluation is on the decline, according to the report. There were 14 overvalued markets in the fourth quarter of 2007, down significantly from the 2006 peak of 53.
Jeannine Cataldi, senior economist at Global Insight, spoke with The Home Front about these markets. Excerpts:
Just how overvalued are these markets?
These markets that have more than 35 percent difference are extremely overvalued. What that means is that home prices are well above what we think the market would push them to.
And the other implication is that these markets are at risk for steep price declines?
Right. Actually, if you go back a couple of years, most of the metros at the top of this list were [in] California, Las Vegas, Phoenix, Florida—all of the ones that are now experiencing significant price declines.
Can you provide an example of how a specific overvalued market has fared in recent years?
One area—to give the real stark picture--is Stockton, Calif. Right now, they are saying that in Stockton, 3 out of 4 homes are either in foreclosure or going to begin foreclosure. And if you look at the data that we have in this report, two years ago—in the first quarter of 2006—homes there were overvalued by about 71 percent. And now, in this quarter, they are at 4.3 percent. And two years ago, the home prices were about $360,000, and now they are about $230,000—a significant difference. The market was just pushed way out of alignment, and now it's coming back down.
What pushed these markets up so much?
St. George [Utah] actually benefited as a retirement community because it is in a beautiful location. So that really drove it up there. And in the Northwest—Oregon and Washington—they actually benefited from people leaving California because home prices there just went sky high. So that's kind of why those areas right now are peaking. And they will gradually come down after things settle.