According to IHS Global, there isn’t a single U.S. metropolitan area where houses are ‘extremely overvalued’ right now. In fact, while a few regions remain moderately overvalued, overall U.S. housing prices are now undervalued.
IHS: When weighting each area by its share of total housing market value, we find that the overall housing market is now undervalued by 8.6%. That compares with a peak overvaluation of 26.1% during the second quarter of 2006. When weighting each area by its share of total housing market units, we find the overall housing market to now be undervalued 10.1%. That compares with a peak overvaluation of 17.1%, during the second quarter of 2006.
Here’s a map of their housing valuations below. By their measures, there are a lot of metropolitan areas with undervalued housing these days, especially in California and the southern U.S.. If you think this sounds completely ridiculous, then there’s a decent chance they’re right.
Here’s a brief description of their valuation method, check out the full report here. They claim some housing markets are undervalued by as much as 20%, especially in California.
IHS: Our approach to determining statistically normal house values considers not only house prices and interest rates, but household incomes, population densities, and any historical premiums or discounts metropolitan areas have exhibited over time.
We examined these factors for 330 metro areas, which now account for 78.4% of all existing housing units in America and 86.4% of all related real estate value, to determine what house prices should be, in this statistical sense.
Based on an historical examination of 155 actual metro area price corrections during the 1985-2008 period, we consider valuations in excess of +35 per cent as “extremely overvalued” and present a risk of substantial price decline (10 per cent, or greater) going forward.
Valuations between ±14 per cent are consistent with one standard deviation of the historically normal distribution, and considered “fairly valued,” accordingly. Between extremely overvalued and fairly valued are areas above the historically normal range, but not so high as to be at risk of substantial price decline. We call these areas “overvalued.” Finally, any area below the historically normal range, below -14 per cent, is considered “undervalued.”