FitchRatings: Home prices overvalued by 10%


There’s growing caution in the optimism about the real estate recovery and rising home prices. A second report reveals home prices aren’t what they appear to be.

Global ratings agency FitchRatings says the fundamentals of a real and sustainable rise in home prices are weak or missing from today’s housing market.

Instead, potentially temporary “technical” factors hold sway, artificially boosting prices.

“Fitch projects that national prices are approximately 10 percent overvalued, in an expected scenario, prices would likely drop by no more than 2 percent nationally from today as inflation pushed prices higher, and sustainable values grew with a stronger economic recovery,” according to Fitch’s “U.S. RMBS 2Q12 Sustainable Home Price Projection.”

The report says, present in today’s housing market are weak fundamentals that typically hinder price growth – high unemployment and lackluster wage growth.

Consumers need a job to qualify for a mortgage and income tenure to pay the monthly bill.

The number of long term unemployed workers is stuck a 5 million, 40 percent of those unemployed. The U.S. Department of Labor only recently reported hourly earnings were growing at the rate of 4 percent a year after being stuck below 2 percent for several years.

Instead of strong fundamentals, housing is getting a boost from low interest rates and a tight supply of existing homes for sale, exacerbated by relatively few home starts and the dwindling supply of foreclosures and distressed sales.

“Fitch Ratings believes price growth is driven by technical factors, such as low rates and lack of supply, and is likely to be muted or even modestly negative in the near-term as liquidation volumes increase and expand supply, particularly in the lengthy judicial states where inventory has been off the market,” the report says.

A few weeks ago, the “RPX Monthly Housing Market Report for October 2012,” by Radar Logic, reported likewise – today’s home price increases are driven by a “change in the composition of sales rather than true price appreciation.”

Rosier regional views

Fitch does go on in the 10-page report to report that there are variances on the regional and local level with some metropolitan statistical areas (MSAs) showing truer home price increases, while others are faring worst the the national overview.

• Twenty-two out of 41 MSAs are currently undervalued or at sustainable home price increase levels and five are overvalued by 5 percent to 10 percent. This compares to 2010 where 23 MSAs were overvalued by 10 percent to 25 percent.

• Hardest hit MSAs such as Phoenix, Atlanta, and Riverside where home price declines ranged from 40 percent to 60 percent have begun recoveries and are now considered as undervalued.

• MSAs in New York and New Jersey remain overvalued by 10 percent to 15 percent due to the large inventory of distressed mortgages that have been kept off market due to the lengthy judicial process.

• Los Angeles and Union, NJ continue to struggle with elevated unemployment and face roughly 10 percent in further price declines.

San Francisco and the Washington D.C. suburbs have not fully corrected with current values unsupported by underlying fundamentals. Fitch expects double-digit declines in those areas.

“It is hard not to be optimistic when home prices rise at their greatest pace since 2005…However, Fitch remains cautious in its outlook due to the role of technical factors behind the positive price movements observed over the past few quarters, particularly in markets where improvements in fundamentals are lagging.”

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