More Than a Dozen Cities, Eight in California, Have Excessive Home Prices:
The percentage above or below expected level based on such factors as
population density, incomes and historical price norms for each market.
They concluded that while there is no major real estate bubble, there are housing "bubblettes" in one-fifth of the U.S. housing stock, "labeled as areas with home premiums in excess of 20 percent, a metric that may indicate future price corrections."
How, you may ask, did anyone determine what home prices should be, versus what they are actually trading hands for? "By controlling for differences in population density, relative income levels, interest rates, and historically observed market premiums or discounts." (Aren’t you glad you asked?)
Potential "bubblettes" include cities such as Chico, Calif., where a buyer will pay the highest premium for a home at 43 percent. Premiums above 20 percent can be found in San Francisco, Miami and Los Angeles. Other key markets such as New York and Chicago came in below the 20 percent mark, at 16 and 11 percent respectively.
The study reveals overvaluation is not pervasive and that many areas are undervalued, such as Salt Lake City, Utah, the most undervalued housing market with a 23 percent discount.
I would imagine this is strictly a function of demand. Who amongst you, dear readers, wants to move to Salt Lake City? Is a 23% discount significant enough to make you become a Jazz fan? Would you rrally live there? I thought so . . . Hence, the discount to par. (Other undervalued cities include Memphis, Tenn., and Macon, Ga).
The significance of this for housing prices — as well as for equities — is that overvaluation presents a risk of future declines.
National City Analysis of Top 99 Metro Areas Finds One-Fifth Of Housing Stock Overvalued
February 10, 2004
Some Housing Markets Overheat
JAMES R. HAGERTY
THE WALL STREET JOURNAL, February 10, 2005; Page D2
You can also download complete data on single-family home valuations in excel format here.