Local Market Monitor is a research firm in the real-estate sector, and they’ve produced a report about the overvaluation trend. According to the firm, overvaluation is getting worse, and houses are priced above what the firm believes is the “fair value.”
According to an article by Les Christie at CNN, home prices are accelerating even though there has been a slowdown in price in some areas.
The level of over-valuation matters in three ways, according to Ingo Wenzer, president of Local Market Monitor. The higher it is, the greater the risk of it correcting; the greater the correction can be; and the longer it will take to return to present-day prices after they fall. “Once markets are overpriced by 40 percent or so, the risk is pretty high and the adjustment can take five to 10 years,” said Winzer.
The CNN article presents a table of the 100 markets tracked by the research firm. New York/Northern New Jersey, my market, is overvalued by 43 percent. I see that as a dangerous situation for buying.
My lease is up at the end of June, and there’s no way I could afford to buy a house in this area.
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That article and table means nothing unless this phrase: “relative to what Local Market Monitor calculates as fair value” is clarified. Actually, even if the article described the methodology by which “fair value” is calculated, those numbers still wouldn’t mean much.
For every housing sale, there is a buyer who clearly thinks the price he paid is fair value (otherwise why would he purchase the house?). Therefore, the fair value is determined by the market, not by some formula developed by the Local Market Monitor.
Yes, but…
The same can be said about stocks. Take the P/E ratio for example. Most people might agree that a P/E ratio significantly higher than that stock’s industry average is an indicator that a stock is overpriced. But still, the stock is being sold and bought at that higher price. The market must be saying that the stock is valued properly, although the numbers indicate that many not be the case, and people are buying high hoping that someone else will buy it from them even higher.
The difference is the P/E ratio is a well-acknowledged formula, while Local Market Monitor uses their own calculation. But logically there’s isn’t much difference between the real estate scenario and the stock market scenario. It’s an issue between “market value” and “fair market value.” If you believe that the market value is always fair because it’s based on actual activity, then you won’t be a fan of calculations and comparisons like those of Local Market Monitor and like the P/E ratio.
I hear you. I’m also NY metro, and there is simply no way into the market. Even a 2 bedroom rental seems out of the price range sometimes.
To follow up on your comment, Flexo, while I agree that fair market value and market value is an issue, the main problem I have with the article is that it does not explain the methodology by which it got their “fair values”.
To continue on your stock market comparison, usually when an article is written detailing whether a stock is overvalued or undervalued, a reasonable argument is made. Sometimes this argument involves the P/E ratio you mentioned, othertimes it may talk about future products or other business issues. The reader needs to be able to follow and understand the argument presented in order to agree or disagree with what was written.
However, in this housing article “fair value” is presented as a given. The reader is supposed to take the “Housing is Overvalued” headline as fact, when it merely is just speculation.