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Global Insight report signals a return to equilibrium
By Buck Maxey  | | Buck Maxey | | Global Insight, a real estate forecasting firm, has pointed out what might be considered the silver lining to the softening, or, in some cases, the considerable decline, of home prices. Global Insight tracks various economic and financial indicators and generates a report which attempts to quantify, among other things, whether a particular area is overvalued or undervalued. The report examines 317 U.S. real estate markets, which constitute about 90% of the single-family housing market, to determine what home prices should be, accounting for differences in population density, relative income levels, interest rates, and historically observed market premiums or discounts. Global Insight considers markets with valuation premiums above 35% to be at risk for price corrections. This figure is based on historical analysis of 63 market price corrections since 1985. Global Insight's most recent analysis, which covers the fourth quarter of 2006, helps to quantify the implications of lower home prices on overvalued markets. The result of these price drops is that the overall number of single-family housing units identified as overvalued dropped from 17% to 16%. Relative to single-family asset value, the percent identified as overvalued dropped from 31% to 28%. The firm notes that single-family home prices in the fourth quarter of 2006 went up 1.8% compared to the previous quarter, which was also a 4.1% jump from the same quarter the year before. Still, on a market-by-market level, 72 metro areas (22%) showed price declines. Not surprisingly, these declines were concentrated in California, Florida, and the New York metro area -- all areas of extremely high appreciation. In fact, for the period from the third through fourth quarter of 2006, California had 21 out of 26 metro areas with negative price appreciation, and Florida was home to 10 of 18 metro areas that had declined in value. Conversely, 21 of 50 states had no price declines. Not surprisingly, areas that had not experienced extreme price appreciation tended to be the best performers at this late stage. Examples include northern Arizona and interior and northern parts of the West, including Utah, Idaho, Washington, and Oregon (with the obvious exception of Seattle). From the third to the fourth quarters of 2007, the number of metro areas designated as overvalued dropped from 60 to 57. The greatest incidences of overvaluation tended to be localized in the Atlantic and Pacific Coasts, although New England appears to be as overvalued as it has in the past. And, although still overvalued, Orange County, Tucson, Reno, and Carson City are no longer defined as "extremely" overvalued. At the other end of the spectrum, Texas, specifically Dallas and College Station, come in at the bottom, effectively the most undervalued areas in the nation; this in spite of solid gains in value. Topping the list, Naples, FL, maintains its dubious distinction as the most overvalued market in the country, although its level of overvaluation has declined to 79.9% for the fourth quarter 2006 from 83.6% in the previous quarter. Jeannine Cataldi, Senior Economist with Global Insight, pointed out, Nearly all markets posted a decline in the level of overvaluation, which signals that the overall housing market is beginning to trend back to more normal price growth." To request a copy of the full report by Global Insight, visit http://www.globalinsight.com/Highlight/HighlightDetail2350.htm. . . . Buck Maxey is HVA's market research analyst, as well as a Licensed REALTOR® and Licensed Loan Officer. He can be reached at 972.761.0046, ext. 173.
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