A study of the top 99 U.S. real estate markets announced today by the economics department of National City Corp. finds tiny housing bubbles – or “bubblettes” – in one-fifth of the U.S. housing stock. These bubblette areas are characterized by home-price overvaluation of 20 percent or more.

The National City Corp. study attempts to answer the question: What should home prices be in each of the 99 largest metro areas after controlling for differences in population density, relative income levels, interest rates and historically observed premiums or discounts in those markets? The study compared these calculated norms to actual current prices.

If actual home prices are much higher than historic prices when factoring in economic data, the survey considers those markets to be bubblettes.

“What we find is a broad dispersion of property market valuations, ranging from a seemingly tenuous overvaluation of 43 percent in Chico, Calif., to an alluring undervaluation of 23 percent in Salt Lake City, Utah,” according to a report on the survey results.

“The housing market has shouldered much of the economic recovery,” said Richard DeKaser, chief economist of National City Corp. and author of the study. “Many are concerned that housing represents an overvalued sector of the economy that will be corrected with future price declines. This study shows that some cities currently may be in the midst of a housing ‘bubblette’ and there is greater risk in these areas for corrections.”

A number of California cities top the list in overvaluation, including Stockton, Santa Barbara, Los Angeles, San Francisco, Modesto and San Diego. These cities range from 34 percent overvaluation to 28 percent overvaluation.

Other key markets such as New York and Chicago came in below the 20 percent mark, at 16 percent and 11 percent, respectively.

DeKaser’s study reveals that overvaluation is not pervasive and that many areas are undervalued, such as Memphis, Tenn., and Macon, Ga.

“While overvaluation in home prices presents a risk of future declines,” DeKaser notes, “these risks may well go unfulfilled. The true test of today’s premiums in these markets will be the economic environment, especially incomes and interest rates, in the years ahead.”

The February edition of DeKaser’s Financial Market Outlook is available online at http://www.nationalcity.com/economics.

The survey identified several areas with overvaluation in excess of 20 percent: Chico, Calif., 43 percent; Stockton, Calif., 34 percent; Santa Barbara, Calif., 34 percent; Los Angeles, Calif., 32 percent; San Francisco, Calif., 30 percent; Modesto, Calif., 30 percent; San Diego, Calif., 28 percent; W. Palm, Fla., 26 percent; Sacramento, Calif., 25 percent; Las Vegas, Nev., 24 percent; Portland, Ore., 24 percent; Miami, Fla., 23 percent; Sarasota, Fla., 22 percent; Detroit, Mich., 22 percent; Saginaw, Mich., 21 percent; and Bellingham, Wash., 21 percent.

And several cities had negative valuation of -10 percent or lower: Des Moines, Iowa, -10 percent; Tulsa, Okla., -10 percent; Harrisburg, Pa., -10 percent; Lincoln, Neb., -11 percent; Houston, Texas, -11 percent; Dallas, Texas, -11 percent; Wichita, Kan., -11 percent; Buffalo, N.Y., -11 percent; Topeka, Kan., -13 percent; Birmingham, Ala., -13 percent; Rochester, N.Y., -13 percent; Oklahoma City, Okla., -13 percent; Baton Rouge, La., -14 percent; New Orleans, La., -14 percent; Albuquerque, N.M., -14 percent; Syracuse, N.Y., -16 percent; Beaumont, Texas, -16 percent; Little Rock, Ark., -16 percent; Macon, Ga., -17 percent; Memphis, Tenn., -20 percent; and Salt Lake, Utah, -23 percent.

National City Corp., headquartered in Cleveland, Ohio, is a financial holding companies. The company operates through a banking network primarily in Ohio, Illinois, Indiana, Kentucky, Michigan, Missouri and Pennsylvania, and also serves customers in selected markets nationally. Its core businesses include commercial and retail banking, mortgage financing and servicing, consumer finance and asset management.


Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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