Housing Valuations and Predicting the Future

I recently discovered a report on House Valuations released by Global Insight.  They use a somewhat complicated formula to determine over-valuation or under-valuation of house prices in 317 metro areas in the United States.

One of the several factors used is the average price of a home in an area compared to the average income.  They also take into account the mortgage interest rates, population density, and something they call a constant. 

The constant factors in the ratio a person would be willing to pay for housing in one area compared to another.  For example, they determined that a person would be willing to pay a greater percentage of their monthly income to live in Hawaii rather than in Massachusetts.

This study has been published for about 6 years now and is a pretty solid predictor of areas where prices should drop.  For example, most of the areas of the country where the over valuation of housing was seen as extreme last year, are experiencing price reductions this year.  The extremely over-valued areas for the 1st quarter of 2007 are in red in the map. (click to expand).

Anchorage is seen as moderately over-valued at about 20% over-valuation.  Compare that to Bend, Oregon, (78%).  Or Prescott, AZ (64%).

Both the chart and the map are from House Prices In America by Global Insight.   If you want a copy you will have to give them your name, address and phone number.   But they don’t ask for your credit card!

I’m always a little hesitant about the results of a nationwide study when it is applied to Alaska.  Alaska is so different that little glitches can throw the results way off.  The only thing that might make a difference here is their use of density as one of their factors.  Depending on where they drew the lines around Anchorage, the density factor could be unrealistic.