The Growing Risk of Housing ‘Bubblettes’

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.

Wsj__bubbles02092005205154_2National City (our former mortgage company) put out an interesting study today of the top 99 U.S. real estate markets. (I spotted this in the WSJ).

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
Richard DeKaser

Some Housing Markets Overheat
THE WALL STREET JOURNAL, February 10, 2005; Page D2,,SB110800082143650881,00.html

You can also download complete data on single-family home valuations in excel format here.


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  1. Will Sargent commented on Feb 11

    What does a housing crash look like, anyway?

  2. lee commented on Feb 11

    We sold most of our multi-family holdings in Calif late last year (for 20% over appraised value by the way). We’ve had these properties for 40 years. Seen many real estate frenzies in Calif since the ’70s. This one makes the others (77-82, 86-90) look like pikers. Don’t know how or when it ends, but it won’t be pretty. We decided to leave the party before the punch bowl is full of ciggie butts.

    Have to giggle when I hear real estate bulls (and we’ve been long and strong here for decades) say that prices won’t fall, but may only rise at the rate of inflation for a while. Do they truly believe that property valued 30-40-50% above trend can remain there forever?

    How will it end? Don’t have a clue. But we are so far into the stratosphere here in Calif that a 20-30-40% fall over 5-10 years wouldn’t be out of the question. Don’t see how the U.S. can afford to let mortgage rates rise much without true carnage in high-priced markets. They will fall anyway, with or without rate rises.

    And forget the supply/demand nonsense. San Francisco homes have doubled in price since 1999, despite a loss in population and jobs. And San Diego homes rose 28% YOY b/w 03-04 despite a net outmigration of population.

    Just read an article that quoted a broker in Walnut Creek attributing that town’s price rise to supply/demand. Yet rental apts/townhomes are at 20-year vacancy highs. No shortage of places to live there, yet folks are lining up to buy $1 million tract homes that they could have bought for $400K five years ago. Go figure.

  3. Drakeview commented on Jul 19

    A housing bubblette

    Earlier in the year Barry Ritholtz over at The Big Picture had a series of articles looking at housing and the case, or lack thereof, for housing bubbles – The Growing Risk of Housing ‘Bubblettes’ started it off. Barry’s attention

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