Friday, March 03, 2006

House Prices in America - A Quantitative Analysis

Here is yet another analysis of how over-valued various housing markets have become (warning -- PDF) conducted by Global Insight and National City Corporation. The authors' analysis is based on a quantitative model that attempts to determine what "fair value" is for a market based on fundamental factors. The document contains a lot of good info. The link was sent to me by a reader from this investment consulting company (which also has on-line articles that discuss the housing markets and which are worth checking out IMO).

Some choice quotes:
If home prices are overvalued then, by definition, the risk of a price correction is high. In the event that such a correction plays out with home prices falling broadly, adverse implications abound.

Our approach to determining fair value in the housing market is statistical in orientation. This contrasts with financial asset valuation, where a vast body of theoretical and empirical literature addresses the question of “intrinsic value.” Rather, our approach examines a particular historical period — 1985 to 2005 — and accepts that house prices, on average, adhered to some normal relationship to underlying determinants during that time.
Here is a list of selected markets showing their percent over-valued estimates for Q3 2005 (from the appendix):
Napa, CA +65%
Oakland, CA +47%
Salinas, CA +75%
San Francisco, CA +35%
San Jose, CA +44%
Santa Cruz, CA +44%
Santa Barbara, CA +70%
Santa Rosa, CA +56%
Vallejo, CA +53%
Interestingly, 80% of the top ten most over-valued markets are in California and of the top 20, 65% are in California.


Anonymous Anonymous said...

kudos to the warning on the pdf. I hate them too. I worked for macr and was laid off by adobe. adobe knows the pdf is slow ( bruce, the ceo joked about it in a company meeting before they axed all the macr employees ). hopefully the macr engineers can speed it up.

Mar 3, 2006, 8:11:00 PM  

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