Home Values: Where Have They Overcorrected (and Where Do They Have Further to Fall)?

Today’s housing market is a confusing one. Six years ago, everyone understood what was happening: Home values were rising, and fast. Two years ago, it was the opposite; values were falling in most markets across the country, with few exceptions.

But now we’re seeing an extreme mix of conditions. According to our Q2 Real Estate Market Reports, values rose in 94 of the 154 markets we covered. Nationally, values were still falling. Today, “volatile” is probably the best way to describe the market.

So how to tell what’s going to happen in different markets? In the absence of market-level forecasts, one way to explore this is by looking at price-to-income ratio. It’s not an end-all, be-all way to forecast a market, but it’s a good way to gauge how home values have changed compared to their historic norms and, more often then not, home values will eventually come back in line with incomes, according to the historic norms of that market.

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So our team of economists sat down to examine price-to-income levels in 130 markets across the country. We shared our findings with The Wall Street Journal. A story on the subject appeared in today’s paper.

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Where have values fallen below their historic norms? That was the case in one-third of the markets we studied, and Las Vegas (25% below the market’s historic price-to-income level), Detroit (35% below) and Modesto, CA (18% below) had some of the most dramatic numbers. Does that mean Vegas home values need to rise by 25% for Vegas to regain normalcy? Not necessarily – there have surely been significant changes in the area’s economy since the housing recession began – but it means there’s a good chance that home values there have over-corrected, and may have some room to rise again before the market reaches equilibrium.

On the other side of the coin were markets like Virginia Beach, Honolulu, and Charleston. These cities would need to fall by at least 50% to reconnect with traditional income levels. That doesn’t mean values will fall by 50% in those markets, but it could signal either a significant change in their economies, or that home values do have somewhat farther to fall.

Where does your market fall? For a more in depth explanation of the research as well as a look at interactive charts of the data used for this analysis see Zillow Senior Economist Svenja Gudell’s brief over at the Zillow Research page.

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