Most Over/UnderValued U.S. Housing Markets

Yesterday, we learned that the NAHB Housing Market Index, a gauge of home-builder confidence, declined to its lowest reading since the 1991 recession:


Source: NAHB, Wells Fargo

Given the high inventory still around, its no surprise that all three components of index dropped: Single-family Home Sales fell to 29 (from 31); Traffic of Prospective Buyers droped to 21 from 22; Expected Sales for the next Six Months declined to 39 from 41.

The last time the HMI was this low was in the throes of the 1990-91 recession.

Rather than spend much time on this well-covered report, I want to draw your attention to a little followed report on Home Valuation. I stumbled across this extremely informative analysis, filled with great
info-porn maps (below) from Global Insight and National City

It looks at the regions of the country which have had the greatest home price appreciation and, by their measures, are the most overvalued.

First the good news: less homes are overvalued today than in 2005, when the study found 45% of all homes 23% of homes were overvalued by 45%.

Today, 14% of homes for sale are still overvalued — but by only 25%:


The following shows where the overvalued/undervalued homes are located:


That decrease in overvaluation comes as no surprise: The huge overhang of inventory = price decreases (see  below).

Thus, many of the over-valued regions are becoming a little less overvalued.

But, depsite the hopes of the bottom-callers, there is still a ways to go.


Full Study: House Prices in America – Q1 2007
A Global Insight / National City Corporation, June 2007

2006 Q1 PDF:


additional graphs, and a summary of the report, after the jump

The report also notes that price declines took place in about half of the
317 markets: "Declines were widely dispersed, though most highly
concentrated in California, Florida, New York, New England, and the
industrial Midwest."



Here is the report’s summary:

• One hundred fifty-seven of 317 metro areas suffered price declines during the last quarter. Cumulatively, these 157 metro areas accounted for 38 percent of all single-family units and half of all single-family real estate assets in the nation. Declines were widely dispersed, though most highly concentrated in California, Florida, New York, New England, and the industrial Midwest.

• Nationally, however, house prices advanced during the first quarter at an annualized rate of just 2.2%. This latest gain falls between the third quarter pace of 2.0 percent and the fourth quarter pace of 2.5%. On a year-over-year basis, prices are up 3.0 percent, the weakest gain in a decade.

• Fifty-four metro areas were judged to be overvalued during the quarter, representing a decline from 62 metro areas (as revised) during the third quarter  More important were declines in the share of all housing units, and real estate assets, judged to be overvalued.  In terms of housing units, the percent deemed to be  overvalued declined from 17 to 14 percent (as revised).  In terms of single-family asset value, the percent deemed to be overvalued declined from 33 to 25 percent (as revised).  Clearly, we interpret the evidence as reflective of prices reverting to their historic norms, though further adjustment is likely.

• House prices have been resilient in the interior West, though we see overvaluation there increasing, making those gains precarious.  Bend, Oregon and Prescott, Arizona are now the nation’s most overvalued markets.  Alternatively, price gains in Texas seem more firmly based, as valuations there are attractive by historical standards.

What's been said:

Discussions found on the web:
  1. matt m. commented on Jun 19

    It still remains to be seen if the weaker RE picture will have a direct negative bearing on domestic and global equities. Many traders have made that bet and it may play out, but it certainly isn’t automatic. Often times, traders and investors let one piece of a puzzle completely dictate their trading strategy, while there are multiple strong trading opportunities playing out around them.

  2. Michael C. commented on Jun 19

    Great info. Thanks, BR!

    In the news, April housing starts revised to +1% from +2.5%.

  3. John F. commented on Jun 19

    Over the long haul (until recently), home price appreciation in the US has more-or-less tracked inflation. Suppose we play devil’s advocate and try to devine why this time might be different. One explanation Barry is bound to like is that inflation is vastly under-stated, but this would imply still a lot of mean-reversion to come. There must be some way to quantify the scarcity factor, e.g., normalizing new construction with respect to household formation. Things sure seem to be getting more crowded. On the demand side, some affordability metric which combines income and wealth effects would be instructive–particularly when we’re trying to explain mean, rather than median prices. Of course, we can always just come back in 10 years or so to see whether this valuation model still holds water…

  4. Michael C. commented on Jun 19

    BBY, reports lower than expected earnings in part due to acceleration in lower margin products like flat panel TVs & video game consoles?

    What’s going on here? Acceleration?! Why the shift towards these products and what exactly is this saying about the consumer?

  5. Michael Donnelly commented on Jun 19

    Jim Diffley and his staff know their regional econ stuff at Global Insight. Jim is a fairly regular speaker at NABE events.

    But how about those charts at the National City link? Whoever the webmaster is, give them a raise.

    Anyway, the canary in the housing market continues to be Florida, it remains with California the most overvalued housing market, but unlike CA, it is primarily retiree and tourism, both of which if outpriced can be relocated elsewhere. CA at least has tremendous international migration, schools, jobs, & vibrant diversified economy.

    Florida has some of that especially the international component, but certainly not the schools or diversified economy.

    If the housing market is going to take another leg down, and I think it will, Florida’s prices should continue to fall.

  6. Fred commented on Jun 19

    I find this rather subjective. In the case of Florida, the market has been in “lock down” mode while legislators decide how to “fix” the problem. They are getting close:

    A resolution of this problem will jumpstart this state’s real estate market…and liquidty will do it’s job on the supply.

  7. BDG123 commented on Jun 19

    Drip, drip, drip. I spend a fair amount of time in LA and the mess is so big out there that I can’t begin to fathom what all of this means. The percentage of population in California licensed as RE agents as a percentage of the entire working population is unbelievable. I used to have the statistic on the top of my head but I think it’s about 5%. It’s available on the California labor web site. As I recall there are 17 million employed in CA and over 1 million RE agents. Now, they may also be employed part time or working in other fields such as RE attorneys or in commercial RE or construction companies but that means every twenty people have their own personal RE agent. There are so many lies, damn lies and stats but supposedly 1 in 5 jobs in Orange County is tied to the mortgage or RE business. I don’t know if that includes secondary and tertiary jobs but………

    That said, I still believe the biggest messes lie in the areas with the lowest appreciation. ie, The Midwest. It’s really not so far fetched if you think it through.

  8. Deborah commented on Jun 19

    Interesting that your map source is National City (NCC). If they knew so much about the 100% overvalued Florida market, why did they buy Fidelity Federal, a south Florida S&L last year?!

  9. michael schumacher commented on Jun 19

    housing starts down…..would’nt want to contribute to the growing inventory problem…

    however let’s take out more permits to build more houses so that they can continue to drive inventory up so that we can still “look” like we are making $$$ building them.

    When will these HB’s learn……..most of these houses they build will have so many incentives to get people to buy them I really wonder if they can turn a profit. Does’nt seem to mater as most fundy’s have not affected the majority of the HB’s.

    Hell WCI is STILL above 19 and they had’nt had a sale for almost 6 months.



  10. michael schumacher commented on Jun 19

    in the macro picture I think the Fed is really trying to get to the mid point (of the ARM reset cycle) without raising rates so that it “appears” that there are no problems. That is not a long term strategy as we have all seen how the bond market will do it for them since they refuse to do it as they should be.

    Cheap money needs to go away…only then will we begin to see what we have done to the economy by main-lining that money supply straight into the bond market (circuitious)we get a skewed picture of the health of our GDP.

    But there is this election coming up…..can it continue to be done?…don’t bet against it.


  11. Karl smith commented on Jun 19

    Just as a side point, I think Barry may have misread the graph. It says that at the peak 23% of all homes were overvalued but the housing market was overvalued by 45%.

    In addition while decling prices are no surprise in California and Florida the interesting thing is that prices are flat or declining in the Mid_West and Texas where homes are already under-valued.

    BR: Good catch — I’ll fix that

    23% of homes were overvalued by 45%.

    “Today, 14% of homes for sale are still overvalued — but by only 25%”

  12. yc32 commented on Jun 19

    By the way, last June some “experts” were telling us that housing stocks were cheap because their PEs were around 5 or 6.

  13. dgoverde commented on Jun 19

    Hey Schooey,

    Sometimes I think I might actually like you.


  14. S commented on Jun 19

    Don Hays says the bull is in its “infancy” and can run until March/April 2009. I know he’s got a reputation for being a permabull (especially tech), but I don’t know if he runs a long/short book or if he’s long only. Anybody know?

  15. Fred commented on Jun 19

    He was among the most bearish in 1999-2000.
    He has been dead on the macro picture.

  16. Fred commented on Jun 19

    Hays is a long only manager. My last post should have read “DEAD ON” on the macro picture. His performance numbers have been very good.

  17. S commented on Jun 19

    The quotes I’ve seen attributed to him over the past 2-3 years suggest he’s been wrongly bullish on tech….until now.

  18. Fred commented on Jun 19

    His technology stocks have done well. Tech is an under owned, contrarian play. Materials and energy were under owned in 2000 as well. The key is a positively sloped yield curve = growth investing. Tech usually does better in an inflationary cycle as well.

  19. Barry Ritholtz commented on Jun 19

    Don Hays has always had a good model. He kinda went nuts politically from 2002-05, but when he avoids the wingnuttery, he’s very rigorous and good.

  20. BDG123 commented on Jun 19

    Don Hays used to be smart. He has had a lobotomy. His models are extremely lacking and very crude in my estimation. You are being kind because you don’t want to slime a peer. Fair enough. Barry, would you put your life savings under Don’s control. I really doubt it. He does not run long/short (His models aren’t sophisticated enough to do so) and has been an advocate of tech and a bear on energy this whole cycle. Now, there have been huge reasons to be bearish on energy for quite some time as the fundamentals are cracking significantly but that is the WORST investing call in the history of mankind. Now, hard assets are in a bubble so as money finally rotates, we’ll see a pick in in tech relative strength but tech is dead. For crissakes, how many years of piss poor capex does it take before these people get it? It looks like they beefed up the thickness of his cranial vault while performing the lobotomy.

    Oh, and being bearish in 2000 is something even my grandmother recognized. The valuation were at their highest level in over 200 years. That’s quite impressive.

    Compare Don Hays with many savvy types who knew tech was dead post 2000 and have been invested in hard assets for seven years. He’s a nice guy but let’s be real. When it comes to money management, we expect better.

  21. Matt commented on Jun 19

    “Oh, and being bearish in 2000 is something even my grandmother recognized. The valuation were at their highest level in over 200 years. That’s quite impressive.”

    Funny, I had someone on another thread disagree with me strongly when I stated that stocks were over valued around that time.

  22. Fred commented on Jun 19

    You and I have disagreed on Hays in the past. You are correct that he “missed” the energy trade. Yet despite that, the fact remains that he has been in a minority of managers that consistantly beat the market for the past 10 years or so. I’m a subscriber of many sources of macro research, and he remains one of the best…(despite politico “wingnuttery”). He has made many tough (laughable to some) macro calls, that proved to be prescient.

    We can agree to disagree.
    Good luck…not looking to argue. ;o)

  23. BDG123 commented on Jun 19

    Well Matt, that person obviously wasn’t my grandma. 🙂

    Fred, you are welcome to your opinion but Hays missed more than the energy trade. Hays became a money manager in the 1990s when throwing darts yielded 25 percent returns per annum. His recommendations this cycle showed a complete lack of understanding of macro factors and investing. If you find his work prescient, that’s great for you but facts aren’t really open to debate. Because I keep my nose to the pavement on most high profile personalities and I haven’t seen anything prescient from him other than that I will be able to use his unabashedly bullish quotes in the future to prove the finality. Finally, he’s called a 30+ percent return in the S&P this year without dividends and we are languishing at about six percent half way through and we are about to get a correction soon.

  24. jules commented on Jun 19

    “I keep my nose to the pavement on most high profile personalities and I haven’t seen anything prescient from him other than that I will be able to use his unabashedly bullish quotes in the future to prove the finality. Finally, he’s called a 30+ percent return in the S&P this year without dividends and we are languishing at about six percent half way through and we are about to get a correction soon.”

    Dude…it sounds like your nose has been too close to the horizontal mirror…chill out. First of all, the market is up almost 10% ytd. His forcast is closer than 90% of the street thus far.

    You can find many “high profile personalities” with a much worse track record — and you don’t have to look too far.

  25. S commented on Jun 19

    I’ve heard Erin Burnett interview Hays twice about his prediction that the SOXX will double this year. Neither time did he back away from the call. I think I found one of the vids on from March 8, but I couldn’t get it to play so I didn’t link to it.

    YTD the SOXX is up around 8%. Anything can happen, but he’s going to need alot of help for that prediction to pan out.

  26. jules commented on Jun 19

    “his prediction that the SOXX will double this year.”

    Lol…check your facts please.

    PS…have you seen the chart of (the hated) Intel recently? 🙂

    This site hates bulls (especially when they’re right).

    That’s cool.

  27. Brian commented on Jun 19

    I’ve been wondering about the Blackstone IPO as well. There was an article in today’s Chicago Tribune about Blackstone’s trouble selling off what remains of their commercial real estate portfolio for which they [over]paid Sam Zell.

    The article mentions that due to the bond yield rise of two weeks ago, they are now expecting bids of ~$300 million less than previous expectations for just the Chicago-area properties. The article also mentioned that the purchase by Blackstone was 90% leveraged.

    1) Perhaps they are seeing liquidity issues with the associated cost increase of debt due on that massive “loan”
    2) The higher interest rates mean fewer buyers and those that do bid will offer less.

    Extrapolate the $300 million profit reduction across their entire property holding…

    With a huge cash infusion RIGHT NOW, could they buy up enough bonds to lower interest rates to get back all those expected profits? And once the property transactions are closed, they could strategically sell the bonds to get that money back. They’d probably lose millions on the bond sales, but they could potentially see a net gain of hundreds of millions when the property sales are considered.

    I don’t know, I’m just wondering why they would push the IPO date up. And it seems that bond prices are rising for no good reason as of late – FCBs aren’t buying much.

    Just a thought.

  28. jules commented on Jun 19


    Perhaps Blackstone already has an oversubscribed book?

    If so, wouldn’t you put it out sooner?

  29. S commented on Jun 19


    I know what I heard. You should pay CNBC for the privelege of viewing their vids to prove me wrong.

    I can’t be sure that it was the March 8 interview. But if you look at the descriptive caption for that date you’ll see he was talking about semis…so that is a good place to start. However, he is a frequent guest of CNBC so who knows if that is one of the two vids where he makes the comment.

    If you are super dilgent, you will find two vids where he said the SOXX will double this year.

    Please prove me wrong.

  30. Comicpro commented on Jun 20

    All in all it looks like we are about to take it in the shorts. The greed has been replaced by an afterthought of care for the people who are about to be foreclosed upon and now we have legislators involved as well..bring the circus clowns in! I live in Boston area and the foreclosures are pages long in the Herald and Globe! I hear all the talking heads on the tube saying there will be no backlas to the overall economy. I believe them I mean they have NEVER been wrong before!

  31. Bob A commented on Jun 21

    Prices are still going up if you’re within range of MSFT campus because there are more and more highly paid people in the area. Talk about GOOG part of new high rise in Bellevue. MSFT already taken most of two soon to be completed buildings. This is not a second home driven market but a market driven by increasing incomes and billionaire spillover. Down the street a home just sold for 2.5m where there previously stood a 600k house. MSFT executive who just transferred in.

  32. Steve commented on Jun 21

    Read the Don Hays advisory…he really hangs his hat on IBES Analyst estimates to see if the market is overvalued…he concludes it is 20% undervalued. But estimates can come down sharply in a recession. Morningstar does DCFs on all the stocks they cover and says market is about 5% overvalued now.

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