From the Journal News:
Analysis: Why housing prices might be primed to fall
By FRANK P. BRILL
If you count yourself among the skeptics who scoff at talk of a housing bubble, you would have found good company three years ago in one coterie of economists who set out to prove the doom-and-gloomers wrong.
“We were very suspicious of that talk and thought it was a bunch of hooey,” said Richard DeKaser, chief economist at National City Corp., a financial-services holding company based in Cleveland.
They formed a joint venture with economists at Global Insight, an economic and financial consultant based in Waltham, Mass., and arrived at a statistical model that tries to use data to explain and account for differences in housing prices in 317 metro markets across the U.S.
“Our initial research found in 2003 that only seven metro areas appeared to be overpriced,” DeKaser said Friday. “When you took the total market value of those markets, it only accounted for about 2 percent of the housing value in the country.”
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“As time played out, housing prices not only continued to rise but continued to rise at an accelerating pace,” DeKaser recalled.Late last month, the venture’s Housing Valuation Analysis appeared to all but sound an alarm about overvalued housing prices. The most recent estimate of valuations for the second quarter found that 79 of the 317 markets were “extremely overvalued and at risk for a future price correction.” Those 79 markets also accounted for about 40 percent of the estimated value of all of the nation’s single-family homes, DeKaser said.
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At least for now, DeKaser prefers to describe the worrisome markets — where the model finds median sales prices overvalued by 34 percent or more — as “regional bubblets,” strong candidates for falling housing prices.The 34 percent threshold is key. In back-testing the data to 1985, the economists found 63 local market price declines where overvaluations at that level and higher were followed in coming quarters by declines of 10 percent or more over two years or more.
The greater New York metro area, which includes Westchester, Rockland and Putnam counties, first touched that level in back-testing in the second quarter of 1987, just before housing prices tumbled.
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“It depends on your personal circumstances,” Cataldi said. “If you need a home, you’re going to buy a home. … If you’re looking to invest … that’s a different story.”DeKaser sounded more circumspect. “If I was moving to your area and expecting to stay for a long time, I would buy a house and forget about all this. … The ability to time all this with extreme precision is hopeful. If you have a long-term horizon — say 10 years — it probably won’t matter in the end.”
And if he only expected to be here for three years? “I certainly would not buy,” DeKaser said, “because I do not see a reasonable expectation for appreciation.”
“Regional bubblets?”
That’s a good one. Who in heaven’s name is this guy trying to talk to?
We’re talking about 40 percent of the market and it’s hard to imagine any region anywhere that is undervalued enough to be considered a worthwhile investment.
It’s also quite clear that the economy, which never quite recovered from the last recession is, at best, heading into another one, though I’ll bet when the analysis is done we’ll find out we’re already in one.
Finally, in an overvalued market you could easily stay on the wrong side of a purchase for well over decade. His advice seems to be “Buy high and sell higher.”
“If I was moving to your area and expecting to stay for a long time, I would buy a house and forget about all this. … The ability to time all this with extreme precision is hopeful. If you have a long-term horizon — say 10 years — it probably won’t matter in the end.”
Well Rich, based on what’s now happening I would say you’re in the minority. Anybody that would “simply forget all about this” and jump into the market now, whether to line in or invest, is a fool and deserves to overpay by double-digit percentages.
If I was moving to your area and expecting to stay for a long time, I would buy a house and forget about all this.
While it would be nice to buy and forget about it, most regular people don’t have the luxury of being that blasé about the biggest financial decision of their lives. Buying a house right now (at least a first time buyer) would mean one or more of the following:
– overextending myself financially
– taking on a risky mortgage and praying for a job promotion or appreciation to bail me out later
– Buying a tiny house that needs a lot of work and hoping that I can sell it later to upgrade
– Moving to PA and resigning myself to 25 hours a week commuting