Extreme overvaluation was seen in the housing market during the second quarter, according to housing valuation report released last week.

Fifty-six of the 299 metropolitan areas studied, or 32 percent of the total single-family housing market, were identified as being at risk for future price declines, according to the second-quarter update of the Global Insight/National City Housing Valuation Analysis. This represents a slight increase from 53 metropolitan areas, or 31 percent of the single-family market, during the first quarter.

“Evidence of bubblettes clearly continues to build,” said Richard DeKaser, chief economist at National City Corp., “though frothy conditions still account for a minority of the overall housing market.”

The net addition of three metropolitan areas to the list of extremely overvalued markets includes five new listings and two areas that have been dropped. New to the list are Fort Walton Beach, Fla.; Portland and Eugene, Ore.; Edison, N.J.; and Bethesda, Md.

Except for Fort Walton Beach, where prices advanced at a 6.9 percent annual pace during the quarter, each area among the five new listings posted increases between 21 and 29 percent. The two metro areas that fell off the list of extremely overvalued markets were Boston and Essex, each located in eastern Massachusetts. While prices there continued to rise at a healthy clip, improving fundamentals, such as income and population gains, helped reduce the imbalance, according to the report.

“We’re not surprised by the emergence of extreme overvaluation in what are clearly hot spots for the housing market,” stated Philip Hopkins, managing director of U.S. Regional Services at Global Insight. “And the Boston area adjustment illustrates the possibility for orderly corrections, rather than inevitable crashes. Outside the hottest housing markets, some signs of a slowdown in the rate of price growth were evident. The average level of overvaluation declined from 22.7 percent to 19.9 percent, with 171 of the 299 metropolitan areas analyzed showing a decrease in the extent of overvaluation between the first and second quarters.”

The Global Insight/National City Housing Valuation Analysis examines the top 299 U.S. real estate markets to determine what home prices should be, controlling for differences in population density, relative income levels, interest rates, and historically observed market premiums or discounts. Markets with valuation premiums above 30 percent were deemed at risk for price corrections based on the typical degree of overvaluation that preceded the 63 known local market price declines observed since 1985.

The Global Insight/National City Housing Valuation Analysis is a joint venture that combines a statistical model originally developed at National City Corp. with data largely developed at Global Insight.

Cleveland, Ohio-based National City Corp. is a financial holding company that offers commercial and retail banking, mortgage financing and servicing, consumer finance and asset management.

Global Insight is a privately held company formed to bring together DRI and WEFA, two companies specializing in economic analysis, forecasting and financial information.

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