From the WSJ:
Home prices in some U.S. markets are rising much faster than rental incomes or what it would cost to build new houses in those markets, according to a new study by a real estate valuation firm.
The growing gap between sales prices, on one hand, and rents and so-called “replacement cost” on the other is evidence of markets that are over-heating, said the report by Jacksonville, Fla.-based Smithfield & Wainwright. “The build-up of false equity is on the rise again,” the report states.
Using inflation-adjusted data, the firm concluded that recent sales prices of single-family homes in 13 states and the District of Columbia are 10% more on average than what the homes would have been appraised for using two other methods.
One of those appraisal methods is simply what it would cost to replace the homes. The other method values homes by applying a multiplier to what those houses would yield in rental income.
Since home prices bottomed out in the second quarter of 2011, the firm says, sales prices increased 13.2% on average through the third quarter of last year nationwide. Meanwhile, rent and reconstruction costs have increased by only 1.9% and 3.3% on average, respectively, the report said.
During the last housing boom, inflated appraisals helped contribute to the run-up in home prices. In December, The Wall Street Journal reported that appraisers are increasingly being pressured to inflate home valuations.
In the story, the Office of the Comptroller of the Currency expressed concern that some of the mortgages banks are giving out are based on inflated values. Freddie Mac said it had launched fraud investigations to determine whether lenders had approved mortgages backed by inflated home appraisals.
In its report, Smithfield & Wainwright compared home sales data from the Federal Housing Finance Agency with how much income homes can produce if rented out (based on data from the Department of Housing and Urban Development) and how much it costs to rebuild homes if they are destroyed (based on data from building-cost data provider Marshall & Swift.)
The gap between prices and the other two variables increased greatly during the last boom. Nationwide, Smithfield & Wainwright’s data show that home prices on average increased 36% between the end of 2000 and the end of 2006 after adjusting for inflation while rent and reconstruction costs increased 5% and 16%, respectively.
The 13 states Smithfield & Wainwright identified as the most over-heated currently are Arizona, Colorado, Idaho, Louisiana, Massachusetts, Montana, New Jersey, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming as well as the District of Columbia.