Fifty-three metropolitan areas representing 31 percent of the total US housing market are considered extremely overvalued and confront a high risk of future price corrections, according to a recent study conducted by National City Corporation and published by USAToday.com. Thankfully for Texans, no community in the state was named to the "high risk" list.

The report by Richard DeKaser, chief economist of National City Corporation, examined 299 metro areas accounting for 80 percent of the US housing market.

The study considers a market extremely overvalued if prices are 30 percent above where the researchers estimated they should be based on historic price data, area income, mortgage rates and population density.

Santa Barbara, CA; Salinas, CA; and Naples, FL topped the list at valuations of 69, 67 and 62 percent, respectively.

Bryan/College Station, Texas, was cited as the most undervalued area in the study, priced 19 percent below where the data suggests it should be valued. Other inexpensive Texas communities included El Paso, Odessa and Killeen.

The highest-risk markets for “correction” are located in such places as California, Southern Florida, parts of the Boston area, specific areas in New York (including Long Island and the counties of Nassau and Suffolk), and Ocean City, New Jersey.

The big culprit: in 85 percent of the cities surveyed, home-price gains outpaced income gains during the past year. In Bakersfield, CA, prices rose 33 percent while incomes increased 3 percent. In 29 percent of areas, prices outpaced income growth by at least 10 percentage points.
Just 2 percent of markets were in “bubbly” territory at the start of 2004, versus 31 percent in the first quarter of 2005.

Some of the most expensive areas or those with the fastest growth aren't necessarily the most overpriced, according to DeKaser's model. Pricey Honolulu, Hawaii, for example, isn't in the top 53.

DeKaser says his study doesn't mean big corrections are imminent, though he sees evidence the housing market could be at or near a crest.

“For the US as a whole, I expect we're going to have an orderly correction. But that doesn't mean it's going to be equally orderly in all places,” DeKaser says.

He says it's rare for property to depreciate, even in overvalued markets, without an economic shock such as rising unemployment. Price corrections might not occur at the same time, and declines in one area could be partly offset by gains elsewhere.

DeKaser's 30 percent threshold for overvalued markets is based on prices in 63 areas since 1985 that later had housing price declines.

Sources: Research Valley Partnership, USAToday.com