Interesting (if understated) article in WSJ yesterday about the PMI U.S. Market Risk Index report; The PMI Index suggested that about "half of the 50 markets are overvalued by 10% or more, the
report said. Only 11 markets are undervalued."
Recall that I have been saying that Housing is an extended asset class, and not a bubble. That makes overvalued regions vulnerable to a pullback, as opposed to a full blown crash.
Here’s the Ubiq-cerpt:™
Home prices in some of the nation’s largest markets are poised
for a fall, according to a study that says homes are overvalued in many
cities.The PMI U.S. Market Risk Index report, released yesterday, named
Boston, San Diego, Long Island, N.Y., Santa Ana, Calif., and Oakland, Calif., as
the markets facing the biggest risk of a price correction. The index showed
these markets have a more than 50% chance of experiencing price declines during
the next two years. New York City ranked 14th, with a 33% chance . . .The markets facing the biggest potential correction are Los
Angeles, Sacramento and Riverside, Calif., where prices are estimated to be
overvalued by 33.7%, 31.3% and 30.7% respectively, the report said. New York
City’s prices are 16.3% overvalued, according to PMI.
Here’s the methodology behind their calculations:
PMI calculated its Risk Index by tracking and comparing
home-price appreciation, labor markets, employment levels, affordability and the
percentage of monthly income that a mortgage takes up in each market. The Risk
Index estimates the chances of a price correction of any size in the next two
years.
The Valuation Index, which the firm just introduced, is based on
home-price appreciation, the cost of a 30-year fixed-rate mortgage and the
public demand for housing in each market. This index offers a snapshot of how
much a home is overpriced or undervalued in each market at this moment.
click for larger table
Source:
Home Prices Might Fall Soon
JANET MORRISSEY
DOW JONES NEWSWIRES
October 19, 2005; Page D3
http://online.wsj.com/article/SB112968655961872744.html
The weakness of this approach is they don’t consider the amount of construction, level of speculative loans, and number of speculators in the market. Without these it tends to be the higher the price, the more risk, hardly enlightening. As most of these are high growth areas, they will also be among the first to recover from a downturn, while a place like Ohio may never.
But save this list. The reason for ranking high on this list is the returns are highest in these areas. After a decline in, say, ten years, these will be the best areas to invest.
Being from a smaller market I find under reporting to be terribly frustrating. Using this list I can tell my clients that we are not one of the 20 worst markets but not where we really stand. Is there any way to get the complete index?
Being from a smaller market I find under reporting to be terribly frustrating. Using this list I can tell my clients that we are not one of the 20 worst markets but not where we really stand. Is there any way to get the complete index?
The San Diego market saw its’ top in the Summer of ’05! Since than, numbe4r of homes for sale have been increasing each month, sales are way off and December saw a tiny appreciation rate.
Once January ’06 stats are in I think many will see a real decline not only in sales but also appreciation. Very soon we will be talking not of APPRECIATION in real estate but DEPRECIATION.
For a insightful ‘insider’ article on the San Diego market, view:
http://www.brokerforyou.com/blogger/index.html
For a complete report updated regularly try googling “House Prices in America” and “Global Insight”