Surviving the Bubble

When is A Home Overvalued? There’s a New Way to Learn

The Charlotte Observer – 10.22.2005

This article highlights a study conducted by PMI, the mortgage insurer and their recent findings on valuing property.  Their index tracks a home’s historical price appreciation values and how current home values are deviating from the norm.

It turns out that several dozen cities are overvalued according to PMI's valuation method. In fact, some areas are dramatically overvalued. Los Angeles, for example, is overvalued by nearly 34% according to the study. Las Vegas is 26% overvalued. San Diego homes are overpriced by 22%. San Jose is overvalued by 27% and Miami is overpriced by nearly 20%.

The article goes on to quantify the risk of a dramatic housing decline in certain communities. Los Angeles has a 46% probability of a significant market decline in the next 24 months while San Diego and Boston have nearly a 60% chance of decline.

The article’s advice mirrors what we have been saying. For buyers, push hard for price concessions as you may be buying at the end of the appreciation cycle and could end up with a house worth less than what you paid for it. For sellers, you may not be able to sell for the price you thought you and the price is likely to go down from here. If you want to sell, price your home reasonably to avoid larger price cuts later to move the property.

California Mortgage Defaults Rise for the First Time in 3 Years

LA Times - 10.28.05

Well, the tide is definitely turning as mortgage defaults, the bulk of which were sent to Southern California addresses, rose for the first time in 3 years.

Analysts credit the rise in defaults to a slowdown in prices and riskier loans which spell trouble for holders who depend on a rising market to lift them out of those mortgages.

Default notices were sent to nearly 13,000 homes during the quarter ending in September—that’s up over 3.5% from last year. 

Default notices can lead to foreclosures, in which owners lose their homes due to missed or late payments. Until now, financially troubled homeowners have been able to easily work through their hardship because the rising values in real estate made those homes easily sellable. Not anymore.

While the number of defaults is just a fraction of the state’s 17 million residences, it is a clear indication of a slowdown. As foreclosures continue to rise while the housing market flattens or dips, more homeowners will find themselves in a tough spot, having to put their homes up for sale at a discount in order to sell the property in a down market.

This slow downward spiral will affect the entire market, just as the buy at any costs mania pushed prices rapidly higher. 

If you have a dangerous loan you must consider refinancing while rates are still relatively low and lending guidelines easy.  If you plan to sell in the next 1-3 years you should consider doing so in the next 6-9 months before the downturn gains momentum.