Housing Prices Now Considered Undervalued

Housing prices across the United States have fallen so far from their previous highs they are now considered slightly undervalued, with further declines yet to come.

That's the conclusion of a new report released Monday by two leading economic and financial research firms, IHS Global Insight and The PNC Financial Services Group, Inc. The quarterly House Prices in America report found that U.S. housing prices fell at an annual rate of 13 percent in the last three months of 2008, declining in 92 percent (302 of 330) of the nation's metropolitan areas.

The quarterly rate of decline was the greatest in the current housing cycle, the study said, and exceeded the fastest appreciation rates of the bubble years of 2004 and 2005. Prices continued to drop most rapidly in the areas where they were formerly most overvalued, in the Southwest and Southeast.

"We expect prices to decline further through 2009 as consumers remain wary of taking on housing debt in these uncertain economic conditions," said Jeannine Cataldi, senior economist and manager of IHS Global Insight's Regional Real Estate Service. "Markets where the boom was greatest, and the fall the hardest, will be watched carefully for any signals that may indicate a trend towards stability and potential growth."

Statewide average home price declines for 2008 exceeded 20 percent in four so-called "sand" states - Arizona, California, Florida and Nevada - and exceeded 10 percent in Maryland, Michigan, Georgia, and Virginia. Prices in five metros in California's Central Valley have fallen to less than half their peaks this decade; 38 other metros have seen prices fall more than 30 percent.

"What is most worrisome about these sharp declines, and the general economic deterioration as 2008 ended, is that there is no sign of a bottom yet," said James Diffley, group managing director of IHS Global Insight's Regional Services Group.

Only parts of the Pacific Northwest, extending into Idaho and Utah, were regarded as overvalued as a region. Housing prices overall have declined nearly 10 percent from their peak of 2007, according to the study. The steep price declines in the quarter coincided with the deepening recession and the Wall Street market tumble. In addition to facing a heavy overhang of unsold inventory and tight mortgage credit conditions, home prices were propelled further downward by collapsing consumer confidence and job losses totaling nearly two million in the quarter, the study said.

The quarterly study examines the top 330 U.S. real estate markets, representing 78 percent of all existing U.S. housing units, to assess the current state of housing prices.