While Economy.com's secret formula based on "an econometric model" forecasts Seattle home prices to increase 59% over the next 10 years, economic and financial research company Global Insight begs to differ. According to their own non-secret formula, Seattle home prices are overvalued by 33.8%, up from 22.3% overvalued at this time last year. Check out the full report and details of their methodology.
Taking off the top 33.8% of the current King County median single family home price of $435,000 would translate to a new median of $287,970. That would be a roll-back to 2002-2003 prices, which is about when I thought homes were expensive, but priced fairly for the area.
The "Most Overvalued Market in Washington State" prize gets awarded to Bellingham, coming in at 54.3%, followed by Mount Vernon at 45.5%. On the opposite end of the spectrum are Kennewick and Yakima, overvalued by 5.9% and 9.1% respectively.
(Global Insight, 09.20.2006)
Update: Two comments were made regarding my remarks above that I wanted to take a moment to address. I apologize for not getting to this sooner, but this is literally the first time I have been in front of a computer for longer than 2 minutes since making this post.
First, JohnS pointed out that 33.8% "overvalued" is not the same as "take 33.8% off the top." Indeed, rather than subtracting 33.8%, I should have divided the current median by 133.8% to arrive at $325,112 (25.3% less than today's median) as Global Insight's fair value for Seattle. If a $325,112 home were 33.8% overvalued, it would come in at $435,000. $325k is a bit more than I think the median King County home should be selling for, but it's still a heck of a lot more reasonable than $435k.
Second, Meshugy brought up the following bits from the methodology pdf:
Users sometimes misinterpret the valuation metrics by assuming that a particular degree of overvaluation implies that house prices are destined to decline by that amount.If you read what I said above, you will notice that I did not say (nor did I claim the study was saying) that home prices would drop 33.8% (or 25.3%, as the case may be). I simply pointed out what home prices would be if they were not 33.8% overvalued. Furthermore, if home prices in Seattle declined by 16.9% (one-half the degree of overvaluation) over the course of the next three and a half years, the median home price in the summer of 2010 would be $361,485, roughly where it was last summer. If you want to derive some comfort from that, be my guest. I think most people would define that as a pretty hard landing.
This would not necessarily be correct for the following reasons. First, housing markets tend to adjust very gradually and price declines, when they occur, have historically averaged 14 quarters in duration. Because house prices determinants generally improve over that time (especially population density and incomes) we observe that price declines are about one-half the initial degree of overvaluation (see Appendix C in House Prices in America: Valuation Update). Secondly, we caution against over interpreting the metrics since the historically normal dispersion of valuations is quite wide. Specifically, our model has a standard deviation in house price valuations of +/-13 percent, meaning that any valuation between 13 percent overvalued and 13 percent undervalued should be considered statistically normal.
Also you should note that as per the standard deviation mentioned above, the Seattle market could be anywhere between 20.8% overvalued and 46.8% overvalued. According to Appendix C of the study, historically:
The more severe the overvaluation, the greater the subsequent declines tended to be.Personally, I think the possibility that Seattle is overvalued by 46.8% is pretty severe, and something we should be paying serious attention to.
The more severe the overvaluation, the shorter the duration tended to be.