Wednesday, March 15, 2006

Overpriced, but by how much?

As bubble-reality becomes the consensus, everyone wants to get on record predicting price declines. The Real Estate Cafe gave readers the chance to submit predictions (here); the results were impressively bearish (the most popular choice was for >10% price drops this year in Greater Boston). Not sure what this means for real estate prices, but it definitely indicates the bearish inclinations of real estate blog readers (you know who you are).

Others have grander ambitions, and have produced predictions for many cities. In a story covering 30 markets nationwide (available at Yahoo Finance here), Ingo Winzer (president of Local Market Monitor, a Massachusetts-based real estate analysis firm) has this to say for the Boston market:

Until about a year ago, homes would go on sale and be gone in a week," he says. "Now they're sitting on the market for a year." He doesn't see the prices dropping rapidly here -- or in any market, for that matter -- because while real estate prices escalate rapidly, they drop slowly.

"In markets that are well-overpriced, prices don't really fall because people just won't sell," he says. "The adjustment mechanism is skewed by people's emotions getting involved. People will grit their teeth and hang on as long as they can to get the price they want."

They might not be able to hang on for long. Burns ranks Boston fourth on his list of markets likely looking at a bubble; Winzer's analysis indicates the market is 33 percent overvalued.

Over at CNN-Money, National City Corp. checks in with an analysis of 299 markets, including several in MA:

Metro Area (Median Price) %Overvalued

Essex County ($344,900) 26.50%
Pittsfield ($189,100) 11.90%
Barnstable ($352,800) 45.80%
Springfield ($208,400) 19.40%
Cambridge-Framingham ($392,400) 9.70%
Boston-Quincy ($358,800) 16.30%
Worcester ($251,700) 28.90%

I can't make much sense out of these numbers. For instance, given their proximity, how can Cambridge-Framingham be only 10% overpriced, while Essex County is 27% overvalued and Boston-Quincy is 16% overvalued? Wouldn't enough people move if such a gradient in value existed to quickly balance the numbers? Do incomes vary enough across these regions to account for the variation in % overvaluation?

What's even more curious is how these numbers have changed since last August, when the same company published a similar study. Back then Boston was 31% overvalued, Essex County 30%, and Cambridge 24%. What happened - did the methods change, or have we already had half the correction from overpriced levels?!? At least in this earlier study the overvaluation numbers were more reasonably clustered.

So what can we take away from these nubers? Not a whole lot, if you ask me. There is no single magic metric for valuation - a house after all is worth what someone is willing to pay for it. But it is becoming increasingly clear that the same house is likley going to be worth less in the near future than it is today. Under those conditions, who knows when and where the new trend will end.

Predictions anyone?


rent to own said...

Agree with your conclusions 100%. Nothing can be made of these numbers. Unfortunately these numbers will be cited, wraped with a couple of quotes from people and become "news".

willydog66 said...

I can certainly attest to the fact that sellers grit their teeth and hold to the bitter end. The first real buying opportunities won't occur until the end of the summer market - if then. Personally, I have decided not to buy. Inflation is *FAR* from under control. Look at gasoline prices - supposidly heading to $3 to $3.50/gal. Everyone is trying to guess what the fed is going to do. The upside potential for real estate investment is near 0, while the downside looms large. No thanks. What an awful time to buy a house.