<strong>ECONOMIC REPORT
U.S. homes now undervalued, economists say</strong>
Prices fall in 241 metro areas in third quarter, and are likely to fall further
By Rex Nutting, MarketWatch
Last update: 11:47 a.m. EST Dec. 3, 2008Comments: 95WASHINGTON (MarketWatch) - The U.S. housing market is now slightly undervalued after rapid price declines have overshot fundamentals, economists for IHS Global Insight said Wednesday. House prices fell at a 6.9% annual pace nationwide in the third quarter, with prices falling in 241 of 330 metropolitan areas. Prices are down 6.5% from their peak in 2007. Compared with their long-term fundamental values, U.S. homes are now 3.8% undervalued, the economists said.
"With no end in sight to the downward spiral of house prices, it is likely that the long-anticipated market correction will now overshoot fundamental valuations on the downside," said James Diffley, head of regional economics at Global Insight. "Weak economic conditions and wary consumers continue to hold the housing market back," said Jeannine Cataldi, senior economist in charge of Global Insight's regional real estate analysis. "Although many areas are seeing home sales increase, it is largely due to foreclosure homes being snapped up at significantly discounted prices. As the inventory of these homes is removed from the market, prices will remain on a downward path."
However, another economist said home prices are still too high in many bubble areas. "Prices in many markets are still hugely out of line with trend levels, as measured by price-to-rent ratios," said Dean Baker, co-director of the Center for Economic and Policy Research. "As long as house prices remain inflated, there is no way that the market can stabilize since there will continue to be a large excess supply of housing putting downward pressure on house prices." Baker suggested that the government order Fannie Mae to refuse to buy mortgages in areas where prices are still out of line, thus forcing prices to correct quickly. Capital should flow to cities with fairly valued homes, Baker said.
The quarterly report from Global Insight and National City Bank compares observed home prices with fundamental values based on differences in population density, relative income levels, interest rates, and historically observed market premiums or discounts. According to the Global Insight report, only three metro areas are extremely overvalued: Atlantic City, N.J., Bend, Ore., and St. George, Utah. In 2005, 52 metro areas were deemed to be extremely overvalued. Home prices fell more than 10% in nine metro areas in central California during the third quarter, Global Insight said. Prices in Merced, Stockton and Modesto are down more than 50% from their peak, while 26 other cities in California, Nevada and Florida are down more than 30%, they said.
