The Growing Risk of Housing ‘Bubblettes’

More Than a Dozen Cities, Eight in California, Have Excessive Home Prices:
The percentage above or below expected level based on such factors as
population density, incomes and historical price norms for each market.

Wsj__bubbles02092005205154_2National City (our former mortgage company) put out an interesting study today of the top 99 U.S. real estate markets. (I spotted this in the WSJ).

They concluded that while there is no major real estate bubble, there are 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."

How, you may ask, did anyone determine what home prices should be, versus what they are actually trading hands for? "By controlling for differences in population density, relative income levels, interest rates, and historically observed market premiums or discounts." (Aren’t you glad you asked?)

Potential "bubblettes" include cities such as Chico, Calif., where a buyer will pay the highest premium for a home at 43 percent. Premiums above 20 percent can be found in San Francisco, Miami and Los Angeles. Other key markets such as New York and Chicago came in below the 20 percent mark, at 16 and 11 percent respectively.

The study reveals overvaluation is not pervasive and that many areas are undervalued, such as Salt Lake City, Utah, the most undervalued housing market with a 23 percent discount.

I would imagine this is strictly a function of demand. Who amongst you, dear readers, wants  to move to Salt Lake City? Is a 23% discount significant enough to make you become a Jazz fan? Would you rrally live there? I thought so . . . Hence, the discount to par. (Other undervalued cities include Memphis, Tenn., and Macon, Ga).

The significance of this for housing prices — as well as for equities — is that overvaluation presents a risk of future declines.


National City Analysis of Top 99 Metro Areas Finds One-Fifth Of Housing Stock Overvalued
February 10, 2004
Richard DeKaser

Some Housing Markets Overheat
THE WALL STREET JOURNAL, February 10, 2005; Page D2,,SB110800082143650881,00.html

You can also download complete data on single-family home valuations in excel format here.


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Debate on Downloading

My friend Cody Willard is a hedge fund manager, focused on telecom and technology. He and I had an interesting public debate yesterday, on P2P, downloading and the music industry.

This was originally published on the (subscription only), but is reproduced here with permission. It got enough positive feedback that I thought Big Picture readers might find it intriguing. For your reading pleasure, Me vs. Cody. Enjoy!


Cody WIllard  :   Piracy
Steals Music Companies’ Thunder

2/7/2005 1:23

The effects of piracy on the economy and the world are just getting started.
Music company EMI told investors today that it would miss sales
projections for the year by about 9%. Trading in England, the stock took a huge
hit on the news, wiping out billions of dollars of value.

Music content sales such as records, tapes and CDs have long trended with the
broader economies. With global economies steadily growing the last couple of
years, the music business should have been on fire. Alas, that is not the case,
and the single biggest reason is piracy.


Read More

Category: Finance, Music


Category: Economy, Politics