Posted on Wednesday, January 19, 2011
Home price declines have been sharp and widespread across the country as foreclosure numbers mount, the gap between supply and demand widens, and local markets inherently correct the unsustainable price run-ups that characterized the housing boom of a few years ago.
But according to Local Market Monitor, a real estate forecasting and risk assessment firm headquartered in Cary, North Carolina, there are scores of metro areas where prices have over-corrected to the point that now, housing in these markets is considered to be “undervalued.”
The company uses a proprietary formula called the “equilibrium home price,” which takes into account local demographic information such as income, job growth, and housing affordability, to determine where prices should be sitting based on what the local market conditions can sustain.
Out of the more than 300 U.S. markets analyzed by Local Market Monitor, Merced, California was found to be the most undervalued. There, the company says actual home prices are averaging $128,413 – 32 percent below the city’s equilibrium price of $188,974.
Local Market Monitor is forecasting residential property values in Merced to remain undervalued for a while, increasing just 1 percent over the next 12 months, giving back that 1 percent over the following 12 months, and holding flat with 0 percent change over the 2013 calendar year. Since the market’s peak in the second quarter of 2006, the company’s data show that home prices have fallen by 62 percent.
Of the larger markets with populations above 1 million, Las Vegas claimed the title of the most undervalued. Local Market Monitor says home prices in Sin City are running 27 percent below their equilibrium value of $198,900. It may sound like a buyer’s market, but the firm’s analysts have tagged the Vegas market as “frankly dangerous” – its lowest rating in terms of investment suitability.
Home prices in the Las Vegas metro area are expected to continue their downward trajectory for at least the next three years. Local Market Monitor is forecasting residential property values there to decline another 5 percent in 2011, 3 percent in 2012, and 2 percent in 2013.
According to Local Market Monitor’s analysis, the 10 most undervalued housing markets in the United States and the percentage by which they are undervalued are:
1. Merced, California: 32%
2. Las Vegas-Paradise, Nevada: 27%
3. Killeen-Temple-Fort Hood, Texas: 25%
4. Akron, Ohio: 22%
5. Cleveland-Elyria-Mentor, Ohio: 21%
6. Warren-Troy-Farmington Hills, Michigan: 21%
7. Mansfield, Ohio: 20%
8. McAllen-Edinburg-Mission, Texas: 20%
9. Reno-Sparks, Nevada: 20%
10. Stockton, California: 19%
Local Market Monitor’s report looks at 316 U.S. markets. Of those, a total of 40 are considered to be underpriced. At the other end of the spectrum, 18 are described as being overpriced when actual home prices are compared to Local Market Monitor’s equilibrium target. The remaining 258 markets fall into the gray area of 15 percent over/under the equilibrium price, which the company deems to be a “normal” market variation.
The 10 most overvalued housing markets in Local Market Monitor’s report and the percentage by which they are overvalued are:
1. Atlantic City-Hammonton, New Jersey: 45%
2. Barnstable Town, Massachusetts: 30%
3. Nassau-Suffolk, New York: 26%
4. Asheville, North Carolina: 26%
5. Portland-Beaverton, Oregon-Washington: 24%
6. Los Angeles-Long Beach-Glendale, California: 24%
7. Santa Ana-Anaheim-Irvine, California: 23%
8. Edison-New Brunswick, New Jersey: 20%
9. San Jose-Sunnyvale-Santa Clara, California: 19%
10. Boulder, Colorado: 19%
By: Carrie Bay, DS News