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Report: Homes Are Less Overvalued after '06 Shakeout

Falling home prices are taking some of the froth out of the nation's hottest housing markets, according to an analysis by Global Insight here.

Nationally, the economic and financial forecasting firm says that 16% of the nation's homes are "overvalued" based on traditional ratios, down slightly from 17% in the third quarter. However, by dollar value, Global Insight said that 28% of the single-family asset value continues to be overpriced, down from 31% in the third quarter.

The company estimates that nationally, single-family housing prices rose 1.8% in the fourth quarter from the third. Year-over-year, prices were up 4.1%. The fourth quarter marked the return to higher appreciation in values for the first time since the second quarter of 2005, according to Global Insight. Up until the fourth quarter of 2006, the quarterly appreciation rate had been declining for a year-and-a-half.

But Jeannine Cataldi, senior economist and manager of Global Insight's real estate service, told MSN that the fourth-quarter numbers don't necessarily mean the bottom of the housing downturn has been reached.

"It's too small of a change to draw any conclusions at this point," she said.

The increases were not universal, naturally. Global Insight found that 72 housing markets, accounting for 22% of single-family real estate assets, saw price declines in the fourth quarter. Those declines were concentrated in California, Florida and the New York area.

According to the study, 21 of California's 26 metro areas suffered price declines in the fourth quarter. Ten of 18 markets in Florida saw prices fall. Naples, Fla., was the most overpriced market, coming in at 79.9% overvalued, according to the Global Insights study.

New England no longer appears to be "significantly" overvalued, Global Insight said.

Nationally, 57 markets were considered overvalued in the fourth quarter, down slightly from 60 in the third quarter. Texas had the greatest number of undervalued markets. In the Dallas market, homes were undervalued by almost 22%, according to the analysis.

But even where markets remain overheated, the evidence suggests that price pressures are easing somewhat.

"Nearly all markets posted a decline in the level of overvaluation, which signals that the overall housing market is beginning to trend back to more normal price growth," said Ms. Cataldi.

She said the data show evidence of migration from higher-cost areas to states and cities that have had less robust price growth until recently. Now, price appreciation is strongest in those parts of the country that came late to the home price boom. Those areas included the interior and northern parts of the West, including northern Arizona, Utah, Idaho, Washington and Oregon.

The U.S. Housing Valuation Analysis is a joint effort by Global Insight and National City Corp. The analysis examines the top 317 U.S. real estate markets, or 91% of the single-family housing stock in the country.

The analysis uses a model to compute where prices should be based on underlying economic and housing data as well as historical trends. When a market is overvalued, that means the current market price is higher than what the model says is statistically normal, Ms. Cataldi explained.

She said the analysis does not suggest any evidence that there is likely to be a collapse in home prices, despite the continuing overvaluation in many markets.

Snapshot: Share of Housing that is Overvalued

Number of Homes 16%

Dollar value of Homes 28%

Source: Global Insight

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