National City Corporation, a large Midwest banking, mortgage, consumer finance and asset management concern, has relased a study on where homes are most overvalued and most undervalued.

A study of the top 99 U.S. real estate markets announced...by the economics department of National City Corp. finds housing "bubblettes" in one-fifth of the U.S. housing stock, labeled as areas with home premiums in excess of 20 percent, a metric that may indicate future price corrections.

....chief economist of National City Corp. and author of the study...Richard DeKaser....examines what home prices should be, controlling for differences in population density, relative income levels, interest rates, and historically observed market premiums or discounts.

"While overvaluation in home prices presents a risk of future declines," DeKaser notes, "these risks may well go unfulfilled. The true test of today's premiums in these markets will be the economic environment, especially incomes and interest rates, in the years ahead."

Which I take to mean that even if you pay an arm and a leg for a home in a hot market, you may well recoup your investment and a tidy profit years down the line when you sell, if buyers' incomes stay healthy and interest rates remain fairly low.

The study's results pose a fairly stark dichotomy between Western Washington cities such as Bellingham (21% premium) and Seattle (14% premium) and Eastern Washington cities such as Spokane (2% discount) and Richland, one of "Tri-Cities" near the Hanford nuclear facility (3% discount).

I suppose it's a total coincidence that the results (listed at the bottom of the second link, above) show housing in many towns in the Midwest is undervalued, and the study's sponsor markets mortgages in that region. But a housing market is often legitimately "undervalued" or "overvalued" due to local economic factors and lifestyle amenities. We could get a heckuva bargain in Idaho, I know, but I'd come screaming back to overbearingly-liberal Seattle because they don't burn crosses on Jews' lawns here, the hiking trails aren't overrun with All Terrain Vehicles, the grocery store vegetables aren't withered and black, and the chicken breasts aren't turning green under the shrink wrap. Plus there are other people with dark features. Too many natural blondes make me real, real nervous. Oh yeah, that jobs thing, too.

My wife and I found a great place for a good price, in Seattle in 1996. And it has probably doubled in value, or more. The luck part was motivated sellers who needed to move back to the East Coast, and close around Christmas. The deserving part was being extremely finicky until a real deal materialized.

Even back then, most of what was on the market in West Seattle (our preferred part of the city, and where we ended up) was overpriced and crummy. For instance, pinched little boxy-roomed places in West Seattle's highly "desirable" North Admiral neighborhood, where the slightly less screwed up K-5 public schools are mericilessly and misleadingly flogged by realtors. Overall, there's a lot of extremely mediocre housing stock in West Seattle, and the city as a whole. Seattle, in fact, is a largely architecture-impaired town, and this is especially evident with respect to the housing stock, and most sadly, the crummy, cheaply built churches (there are a few notable exceptions, of course).

Still, this cantankerous Chicago boy couldn't be happier about having put down roots here in Seattle. And for a conservative writer, what material!

Posted by Matt Rosenberg at February 23, 2005 06:05 PM

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