Real Estate Gurus, Shopping for a House - GoFuckYourself.com

Barefootsies · 05-14-2007, 06:57 AM

America's most overpriced home markets

San Diego has plenty of sunshine but little affordable housing. Only 5% of local residents could buy a median-priced home -- one reason the city grabbed the dubious honor of ranking No. 1 on this list.

By Matt Woolsey, Forbes.com

Forbes.com slide show: America's least overpriced real-estate markets
The most expensive home sales of 2006
Video: Will housing spring back?
No matter the locale, denizens almost always gripe about the stiff cost of living, housing and doing business. But in some places the financial pain is clearly more acute than others.

Take San Diego. A slumping housing market, where only 5% of residents could afford to buy the median home, and a high price-to-earnings ratio have made the oceanfront city the nation's most overpriced real-estate market. Had weather been included as a statistical measurement, there's no doubt San Diego would have avoided our list of top 10 most overpriced cities, but we didn't factor in sunshine.

Arriving at the relative value of a given market isn't as simple as calculating median home prices, income rates and the cost of living. Instead, our list of most overpriced real-estate markets incorporates a more meaningful methodology.

Behind the numbers

Using the 40 largest metro areas, we started by estimating a price-earnings ratio for each market. (Like the P/E ratio of a stock, this value attempts to measure the price a homeowner would pay for $1 of return.) Using data from the National Association of Realtors (NAR), the U.S. Census Bureau and the Office of Federal Housing Enterprise Oversight, we took each market's median home price and divided it by annual rents minus taxes and insurance for those properties. For this exercise, we assumed other costs don't vary drastically from city to city.

The average P/E ratio for the 40 markets is 28. Note: Unlike, say, the S&P 500 Index of stocks, ours is not a weighted-average ratio. If it were, certain cities with greater overall sheer market value would carry more weight.

We incorporated a second metric: an affordability index. Calculated from National Association of Home Builders and Wells Fargo data, the affordability score is the percentage of the population that can afford to buy the median-priced home, assuming a 6% mortgage rate. In a city such as Los Angeles, No. 4 on the list, a wee 2% of homes are affordable for residents pulling down a median income.

Consider Detroit. Almost 88% of its homes are available to those with a median income, and its 17.5 P/E ratio appears relatively low, but that doesn't make real estate in the Motor City a good investment. Already-stagnant home prices have decreased at a rate of 1% over the past year, and, of the major metros, Detroit is the only one on our list to have lost jobs since 2005. (New Orleans also lost jobs, but it was left off the list because after Hurricane Katrina its statistical figures were such anomalies that it wasn't comparable to the rest of the cities.)

So which markets are in bubble territory? Look for a high P/E ratio, low affordability, low income growth and a high cost of living.

San Francisco, ranked fourth, fits that bill. Despite home prices growing at a 2% clip over past year, according to the NAR, the city by the bay ranks third to last in expected income growth, reports Moody's. That's not good news in a market where only 7.5% of housing is affordable for the median-income earner. Combine that with a housing P/E ratio over 50, and it isn't difficult to imagine some softening on the horizon.

The usual suspects littered our list: Miami came in second, followed in order by Sacramento, Calif.; San Francisco; Washington, D.C.; Honolulu; New York; Los Angeles; Boston; and San Jose, Calif.

In Detroit, houses cheaper than cars
Top 10 'value' cities for retirees
Talk about it: Give us your 2007 market predictions
At Forbes.com: How much home $1 million buys in the U.S.
MSN Money: To cut costs, move to small-town USA
10 low-cost locales where jobs are plenty
At Forbes.com: Most expensive U.S. rentals

http://realestate.msn.com/Buying/Art...0945&GT1=10029

05-14-2007, 06:57 AM	#1
Barefootsies Choice is an Illusion Industry Role: Join Date: Feb 2005 Location: Land of Obama Posts: 42,635	Real Estate Gurus, Shopping for a House America's most overpriced home markets San Diego has plenty of sunshine but little affordable housing. Only 5% of local residents could buy a median-priced home -- one reason the city grabbed the dubious honor of ranking No. 1 on this list. By Matt Woolsey, Forbes.com Forbes.com slide show: America's least overpriced real-estate markets The most expensive home sales of 2006 Video: Will housing spring back? No matter the locale, denizens almost always gripe about the stiff cost of living, housing and doing business. But in some places the financial pain is clearly more acute than others. Take San Diego. A slumping housing market, where only 5% of residents could afford to buy the median home, and a high price-to-earnings ratio have made the oceanfront city the nation's most overpriced real-estate market. Had weather been included as a statistical measurement, there's no doubt San Diego would have avoided our list of top 10 most overpriced cities, but we didn't factor in sunshine. Arriving at the relative value of a given market isn't as simple as calculating median home prices, income rates and the cost of living. Instead, our list of most overpriced real-estate markets incorporates a more meaningful methodology. Behind the numbers Using the 40 largest metro areas, we started by estimating a price-earnings ratio for each market. (Like the P/E ratio of a stock, this value attempts to measure the price a homeowner would pay for $1 of return.) Using data from the National Association of Realtors (NAR), the U.S. Census Bureau and the Office of Federal Housing Enterprise Oversight, we took each market's median home price and divided it by annual rents minus taxes and insurance for those properties. For this exercise, we assumed other costs don't vary drastically from city to city. The average P/E ratio for the 40 markets is 28. Note: Unlike, say, the S&P 500 Index of stocks, ours is not a weighted-average ratio. If it were, certain cities with greater overall sheer market value would carry more weight. We incorporated a second metric: an affordability index. Calculated from National Association of Home Builders and Wells Fargo data, the affordability score is the percentage of the population that can afford to buy the median-priced home, assuming a 6% mortgage rate. In a city such as Los Angeles, No. 4 on the list, a wee 2% of homes are affordable for residents pulling down a median income. Consider Detroit. Almost 88% of its homes are available to those with a median income, and its 17.5 P/E ratio appears relatively low, but that doesn't make real estate in the Motor City a good investment. Already-stagnant home prices have decreased at a rate of 1% over the past year, and, of the major metros, Detroit is the only one on our list to have lost jobs since 2005. (New Orleans also lost jobs, but it was left off the list because after Hurricane Katrina its statistical figures were such anomalies that it wasn't comparable to the rest of the cities.) So which markets are in bubble territory? Look for a high P/E ratio, low affordability, low income growth and a high cost of living. San Francisco, ranked fourth, fits that bill. Despite home prices growing at a 2% clip over past year, according to the NAR, the city by the bay ranks third to last in expected income growth, reports Moody's. That's not good news in a market where only 7.5% of housing is affordable for the median-income earner. Combine that with a housing P/E ratio over 50, and it isn't difficult to imagine some softening on the horizon. The usual suspects littered our list: Miami came in second, followed in order by Sacramento, Calif.; San Francisco; Washington, D.C.; Honolulu; New York; Los Angeles; Boston; and San Jose, Calif. In Detroit, houses cheaper than cars Top 10 'value' cities for retirees Talk about it: Give us your 2007 market predictions At Forbes.com: How much home $1 million buys in the U.S. MSN Money: To cut costs, move to small-town USA 10 low-cost locales where jobs are plenty At Forbes.com: Most expensive U.S. rentals http://realestate.msn.com/Buying/Art...0945&GT1=10029 __________________ Should You Email Your Members? Link1 \| Link2 \| Link3 Enough Said. "Would you rather live like a king for a year or like a prince forever?"