http://www.usatoday.com/money/economy/housing/2005-08-16-home-prices-usat_x.htmWASHINGTON — 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.