Study: Home Prices Likely to Overcorrect

After strong evidence suggesting a moderation in the pace of home price declines nationwide earlier this year, new data is now suggesting that home price declines have sped up in recent months. Single-family U.S. home prices fell at a faster pace across a wide area of the country during the third quarter, hitting a 6.9 percent annualized pace, according to data released Wednesday morning by economic think-tank IHS Global Insight. Average home prices are now 6.5 percent below their 2007 peak, the forecasting firm said, with home price declines affecting 241 of 330 major metropolitan areas — up from 150 areas seeing price declines just one quarter earlier. While the contraction in residential real estate value is national in scope, it is most severe in the Southeast and Southwest, areas which were among the most overvalued in the country three years ago. According to the third-quarter analysis by IHS, extreme overvaluation is now “essentially nonexistent” — only three metro areas of the hundreds analyzed met the firm’s definition of extreme overvaluation, down from a peak of 52 metro areas in 2005. Only the Pacific Northwest remains overvalued, IHS said. For the United States as a whole, the housing market is actually now slightly undervalued according to the firm’s metrics. When weighted by market value, the nation is an estimated 3.8 percent undervalued; when weighted by housing units, it is 5.7 percent undervalued, IHS economists said. “With no end in sight to the downward spiral of house prices, it is likely that long anticipated market correction will now overshoot fundamental valuations on the downside,” said James Diffley, group managing director at IHS. According to the analysis, the accelerated pace of depreciation likely reflects financing conditions that became increasingly stringent and expensive; the overhang of unsold properties trended downward during the third quarter, and demand picked up slightly. Recent policy responses, from the Federal Reserve in particular, to purchase mortgage-backed securities are not likely to have a significant impact until next year, analysts with IHS said in the report. Home prices fell more than 10 percent in the third quarter in nine central California communities. The Central Valley communities of Merced, Stockton, and Modesto have seen property values fall to less than half their 2005 value. Twenty-nine metro areas in California, Florida, and Nevada — at one time among the most overvalued — have now seen price declines in excess of 30 percent. Similar steep price drops are also occurring in Michigan, northeast Ohio, the southern metro areas from Charlotte to Atlanta, as well as in New England. The incidence of extreme overvaluation has become negligible; only Atlantic City, New Jersey; Bend, Oregon; and St. George, Utah met the criteria used by IHS. Overvalued markets are mainly located in the Pacific Northwest, extending to Utah. Southern metro areas from Mississippi to Texas remain generally undervalued. “Weak economic conditions and wary consumers continue to hold the housing market back. Although many areas are seeing home sales increase, it is largely due to foreclosure homes being snapped up at significantly discounted prices,” said Jeannine Cataldi, senior economist at IHS and a co-author of the home price study. “As the inventory of these homes is removed from the market, prices will remain on a downward path.” The study is a joint effort by IHS Global Insight and National City Corporation (NCC), and examines the top 330 U.S. real estate markets, representing 78 percent of all existing housing units and 86 percent of all related real estate value. For more information, visit Write to Paul Jackson at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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