In a recent report, Global Insight looked at home values throughout the country and concluded that "extreme overvaluation of house prices is essentially nonexistent."
From Global Insight:
Only six metro areas are judged to be overvalued during the second quarter of 2008, down from a peak of 51 metro areas in 2005.
Still, that leaves a half-dozen housing markets that, according to the firm, "present a risk of substantial price decline (10 percent, or greater) going forward."
So, which markets could still have a home price crash?
2008/Q2 Price (,000) Overvaluation Atlantic City, NJ $258.9 51.6% Bend, OR $285.0 46.6% Longview, WA $207.8 37.0% Honolulu, HI $664.2 35.8% St George, UT $237.4 35.7% Wenatchee, WA $259.1 35.1%
Here's the methodology from Global Insight:
Our approach to determining statistically normal house values 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. We examined these factors for 330 metro areas now accounting for 78 percent of all existing housing units in America and 91 percent of all related real estate value, to determine what house prices should be, in this statistical sense.
Based on an historical examination of 142 actual metro area price corrections during the 1985-2008 period (see Appendix C), we consider valuations in excess of +35 percent as "extremely overvalued" and present a risk of substantial price decline (10 percent, or greater) going forward. Valuations between ±15 percent are consistent with one standard deviation of the historically normal distribution, and considered "fairly valued," accordingly. Between extremely overvalued and fairly valued are areas above the historically normal range, but not so high as to be at risk of substantial price decline. We call these areas "overvalued." Finally, any area below the historically normal range, below -15 percent, is considered "undervalued."