The Most Over-Valued and Under-Valued Housing Markets in the U.S.
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Local Market Monitor released their annual analysis of housing markets across the country and tagged eight localities as overpriced (versus 37 in mid-2006) and 15 underpriced (six in 2006).
This goes to again prove the axiom that “There is no such thing as a national real estate market.”
If there is one good fall-out of this recession it is the return to sanity in generalized home values.
Historically, median home prices have hovered at or below three times median household income (this will vary significantly from city to city). As shown in the graph, the U.S. pretty much tracked this until 2002 – and then we lost track in what a person could afford in a home and rather focused on how rich a person could get by holding a house for a short time and selling it for more.
When I was working on my Master’s Degree in Real Estate and Land Economics in the 1970s at Texas A&M, we had an awesome professor that had a unique term for that phenomenon. He called it “The Bigger Sucker Doctrine.” That’s when a sucker comes along and pays too much for a property and hopes that a bigger sucker will come along and pay even more. And you can see, that happened until 2006.
So how much overvalued was housing? If you take a 12-month moving average, then the peak ratio of Price to Income was 3.9 in May of 2006 indicating that homes were basically 30 percent over-valued (some markets more, some markets less—but 30 percent on average).
And how much have home values declined? In the second graph, U.S. median prices for existing homes are shown. In this series, the 12-month moving average median price peaked at $227,600 in November 2005 and since has fallen 24 percent (rounded) to $172,600. This would indicate there is a potential added 5 percent decline in home prices remaining. I would hypothesize that abnormally low interest rates have kept home prices there, but if interest rates were to rise abruptly, then we might realize some if not all of that 5 percent decline. If however, rates climb slowly (and jobs start climbing at a reasonable rate) then home prices have probably bottomed.
The argument could be made that interest rates have risen abruptly. The last two graphs show the monthly and weekly 30-year residential mortgage rates as reported by Freddie Mac. Since the second week in November 2010, interest rates have already jumped 60 basis points. Wow.
All told, job growth really needs to ramp up to avoid another couple percent decline in home values.
And for those of you looking for these data sources—see the following links.
Tell me what you think.