For the individual real estate investor, media reporting of the national real estate market is simply not very useful. But it’s all we hear. Phrases like “the housing crisis,” “the subprime meltdown,” and the now ubiquitous “housing bubble” pepper economic news reports. For many, it’s tempting to take this news and conclude that now is not a good time to buy, or conversely, that now is the best time to buy. Others point to current national trends and reach even broader conclusions that real estate is a bad investment or, for would-be homeowners, that renting is better than buying.
In this climate, repeating the old adage that “real estate is local” takes on particular meaning. For the individual real estate investor in Utica, New York, it matters little whether real estate in Santa Barbara, California is overvalued. Recently, I ran across an interactive map, reflecting results of an analysis of real estate values in various areas of the country by National City Bank’s economics department.
The map summarizes conclusions from a study of home values in 330 metropolitan areas comparing home prices for the second quarter of 2007. The map categorizes areas that are overvalued, moderately overvalued, fairly valued and under valued and reflects the percentage of over or under fair value. The valuation conclusions are based on the ratio of household income to home prices, adjusted for household population density (i.e. number of homes per square mile), mortgage rates, relative income level between areas, and a constant. The constant reflects historical higher or lower income to price ratios for a given area, which attempts to capture other preference factors.
What Bubble?
Not surprisingly, many of the red zones–the overvalued areas–appear in the West Coast, Arizona, Florida, and the District of Columbia–the same areas that had those daunting price growth rates in the years leading up to the current market. And indeed drilling down to one of the overvalued metro areas illustrates when the speculators stepped in. Take Flagstaff, Arizona, for example. The graph below shows the growth rate of incomes in line with home prices right up until the 2004-2005 and then pop–people paying prices for homes like they’re going out of style.
But then there are all of those green areas–fairly valued–such as areas throughout the Midwest and much of the South, for example. Even a few gray (undervalued). For those areas, there was no period of out-of-line price increases. That’s right–no bubble.
There’s certainly no shortgage of negative news in residential real estate. But this resource provides a little perspective. While few markets will be completely immune from negative impacts from problems in the mortgage market, not every area will be experiencing a price correction. Quite simply, in many areas, none is needed.
{ 6 comments… read them below or add one }
Great graphics! I still haven’t figured out yet how to get a picture in one of my posts - not that really wanted to do it but still.
The media does tend to suck sometimes, if not all the time…the “sub-prime” crisis is a good example. If you read enough newspapers you might conclude that all the major banks are going out of business….
Mike
Good analysis of the so-called “housing bubble.” Arizona is one of the “red” states, but my thought is that most sellers still still want the peak prices that houses were getting earlier. Once reality sets in, prices will drop down to meet what buyers are willing to pay, and the economy will be back inequilibrium. I think of it as more of a adjustment period rather than a “crises.” It’s a crises for those incivduals who took out, and those lenders who made, bad loans. For the rest of us, life goes on as usual.
On the other hand, if Douglas Adams was right, and the only real truth is that “the entire multidimensional infinity of the Universe is almost certainly being run by a bunch of manics,” maybe there is something to worry about.
Now you’ve got me re-considering, Terry. I’ve always been of the belief that all great truths came from D. Adams.
That’s a really neat tool. And it’s always good to know I live smack in the middle of an overvalued area. Can’t wait to see housing prices drop.
bubbles bubbles everywhere. all thoe chicago bubble was rather fun. nothing like a good tough market.
designatedagents.com
Great blog! I look forward to visiting often!