Massive Home Value Decline Unlikely Despite Overvaluation

It is unlikely that the mortgage industry will witness massive declines in home values across the country in the near future despite recent subprime woes, according to a recent report by the GeoStat Advisory, a Laguna Hills, Calif.-based housing consultancy.

In the report, "Estimates of Over and Under Valuation of Homes by Metropolitan Areas," GeoStat states that the growing imbalance between home prices and rents has meant that homes in many markets are now overvalued, since the option of renting, rather than buying, is financially more attractive to potential buyers.

While most regional housing markets in the U.S. exhibit strong signs of overvaluation, value adjustments in 2007 are likely to be in the 3% to 8% range in most markets with the prospect of no growth or nominal growth in others.

"In a study of home values across major U.S. housing markets, we have concluded that most markets are likely to see moderate downward price adjustments in 2007," according to Nima Nattagh, author of the report. "There are significant regional variations, though, with the prospect of drastic price 'corrections' in some markets and the possibility of further price increases in others."

GeoStat's model takes into account the historical relationship between rents and home prices between 1990 and 2006 and is based on the rent-to-price approach to real estate valuation, which is used extensively in housing research and by appraisers. Through much of the 1990s, home prices and rents moved in tandem.

However, price increases began to outstrip rental growth in 2000, particularly in Southern California, South Florida and the metropolitan areas of the Northeast.

The Pittsburgh, Dallas, Riverside-San Bernardino and New York metropolitan areas are the most overvalued markets. At the other end of the scale, St. Louis, Minneapolis and Phoenix are the most undervalued markets.

While home prices continued to grow at double-digit rates in many parts of the U.S., rents for comparable properties lagged behind. Since 2000, home prices in Los Angeles, for example, have increased by an average of 16.9% while rents have grown by 7.6%. In Miami, home prices grew by 17.7%, which is more than five times the rate at which rents increased. This growing gap between home prices and rental growth is most noticeable in California, South Florida and New York.

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