Report: 71 U.S. Cities Way Overvalued; South Florida, California Leading the Way

Single-family homes in 71 U.S. cities are extremely overvalued as of the first quarter of 2006, and are at risk of significant price correction, with the costliest properties largely comprised of California and South Florida real estate.

In a joint study released this week, National City Corp. and consulting firm Global Insight said that although the rate of price appreciation nationally has slowed in recent months, the number of overvalued markets rose 11 percent (from 64 cities) since the end of 2005.

Overall markets with prices far above where they should be based on income, employment and other variables represented 39 percent of all single-family housing in the first quarter of 2006. As recently as 2004, only three areas, representing 1 percent of the U.S. market, were considered grossly overvalued.

“Those markets that have been showing the highest appreciation rates and are most overvalued are continuing to see prices increase currently,” said Jeannine Cataldi, senior economist at Global Insight.

Home price appreciation on average was fastest (10.1 percent) in the 50 most overvalued markets during the quarter and slowest (2.7 percent) in the 50 most undervalued. Still, expect a gradual slowdown in home price gains, rather than anything abrupt. While some areas may see a more pronounced decline than others, the South Florida housing market is not expected to see a major dropoff due to continued overseas and investor demand.

Salinas, California and the Naples real estate market here in Florida were the two of the most overvalued, according to the report. On the other end of the spectrum, a trio of Texas markets — College Station, Dallas and Fort Worth — were the most undervalued. For reference, the median price of $383,000 in Naples was 102.6 percent over, whereas the $94,000 in College Station was 24 percent less than the market could bear.

Overall, 17 of the 20 most overvalued markets are in California and Florida. San Francisco and San Diego are seeing prices flatten, as is Boston, Mass.

The report tries to calculate statistically normal home values, or where house prices should be, by looking at factors on top of prices and home loan rates, including employment, population density and historical premiums and discounts in cities over time. Analysts looked at 317 metro areas accounting for 84 percent of U.S. values. Previously, they studied 299 areas.

The report uses data from the federal Office of Federal Housing Enterprise Oversight (OFHEO) and considers cities above normal prices by 34 percent or more to be extremely overvalued.

According to government and private data, prices and sales are slowing from the record-setting pace of the past five years. The National Association of Realtors said new-home sales dipped nearly 6 percent in April 2006 from year-ago levels. New home prices rose 4.2 percent in that period. OFHEO data shows home prices rose 7.3 percent in the first quarter, not including refinancing, down from a high of 12.5 percent in 2005.

Economists expect further slowing ahead, especially if the Federal Reserve keeps raising interest rates. Mortgage giant Freddie Mac believes the U.S. housing sector peaked last fall, and that the nation is on its way back down, with construction easing, sales declining and inventory of unsold homes piling up.

Freddie Mac believes that the market will not crash, but that sales will decline 7 percent from 2005 levels, with 30-year fixed-rate mortgages averaging 6.7 percent at the end of 2006 and 6.8 percent in 2007. Freddie also believes new construction will slow down. You can see a full chart detailing how all 317 markets stack up in terms of value by checking out the complete report, published today by USA Today.