Most Over/UnderValued U.S. Housing Markets

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

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Given the high inventory still around, it's no surprise that all three components of index dropped: Single-family Home Sales fell to 29 (from 31); Traffic of Prospective Buyers dropped 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.

Source: NAHB, Wells Fargo

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 Corporation.

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

Source:

Full Study: House Prices in America - Q1 2007
A Global Insight / National City Corporation, June 2007
http://www.globalinsight.com/Highlight/HighlightDetail2350.htm

2006 Q1 PDF: http://www.globalinsight.com/gcpath/1Q2006report.pdf

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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.

Comments

[Sonia Mirza:]

"over-valued regions are becoming a little less overvalued"

could you quantify "a little less overvalued" please?

Also, do you have more detailed info on the PA market? I'd be curious although, totally not expecting an answer...

2007 Jun 19 11:13 PM

[ritholtz:]

Yes -- see the chart above to see how much "over-valued regions are becoming a little less overvalued"

2007 Jun 20 05:52 AM

[Sonia Mirza:]

Right, are you assuming I did not look at the chart above because I am a girl?

Perhaps my question wasn't terribly clear - or rather what I was implying might not have come across. Frankly, looking at the info above, it didn't look like something to write home about - precisely as Paul mentioned below.

And have we controlled for inflation? Are we talking in REAL terms?

YOY price gain of 3% - still a gain, even if the magnitude is smaller than previously - and we were all expecting this - we knew the housing mkt was out of control.

Re: "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."

And what of outliers that might skew the results? What are the results without these?

Re: "23% of homes were overvalued by 45%.

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

So, number of homes overvalued falls by approx 40%
and the correction of about 44% in the overvaluation still does not impress me - so what?

Thanks for the response though - as condescending as it may have been.
I would never have thought to look at your charts (I mean GI/NC's charts) had you not guided my female brain to the right picture. I wonder how I managed to get an MBA in Finance and Accounting - and price options better than our class valedictorian...must have gotten lucky.

2007 Jun 20 06:07 PM

[Paul Meisel:]

Maybe you had one of those nifty calculators?

Just kidding.......

2007 Jun 21 07:48 AM

[Sonia Mirza:]

Having a nifty calc is not = being able to use it ;o)
I did have one of those, but I'm an xls junkie particularly for options
Although since I didnt even read the charts above (allegedly) I must just have gotten REAL lucky.

John was right about Captain Obvious' arrogance...
Makes you wonder what one has to be so proud of if one is a self professed stinky forecaster?

Gotta love that patronizing condescension

feel sorry for your clients, Captain.

2007 Jun 21 12:23 PM

[Paul Meisel:]

Good information.....

Putting things in perspective, a middle-class family that has been in a $200K home for 10 years has realized 2.5% or 3% annual appreciation instead of the 5% they might have hoped for... not exactly a big problem.

But folks who have been in a short time, were on the edge of affordability, and have to make a move are literally in a house of pain.

2007 Jun 20 09:49 AM

[hilarious:]

My bunghole hurts.

2007 Jun 20 10:56 AM

[Johnny Bitc...:]

This guy's arrogance, while annoying, is not the problem.

The problem is that the guy doesn't provide any analytical value - just another internet addicted stock market chattering fool as far as I can tell (Dear Editors - read Ritholtz commentary and if there is not serious evidence that he's just a chattering fool, please delete my commentary).

Is it really value added to have a net surfing fool cutting and pasting charts from other websites ?

I don't think so.

One wonders whether Ritholtz even understands the methodology used to determine fair value for the houses. That's really the important thing to understand.

Or perhaps one should just assume that the random data cut and pasted by Ritholtz is grounded in sound analysis. Homey don't think so.

John

2007 Jun 21 02:01 PM

[jjason:]

Dear Johnlewing and Sonia too.... I have followed many links to sites by all the authors on Seeking Alpha and I have found Barry's links and comments to be interesting, informative and helpful.

Thanks Barry and thanks Seeking Alpha.

This article, on housing being overpriced/underpriced must be taken in perspective. As a former member of the National Association of Realtors, and a former Real Estate Appraiser (I have an MBA too Sonia) it is not an easy task to predict the downturn. I knew housing was getting overpriced in 1Q2006. But NAR, Real Estate Brokers and the Builders were not telling the public. So, if the "professionals" were not being honest, what do you do. Honesty in the business world is hard to come by, Eh?

So, what's your problem, John? PS. If you plan to attack me for this post, please do it in your bathroom mirror. Saves me the trouble of writing you a reply.

Finally...Barry...Keep up the good work. I read everything you write because it gives me something to think about and use in evaluating what investments to make.

2007 Jun 24 03:10 PM