The debate over whether a real estate price correction is around the corner is continuing with no definitive answers, but a new study says Naples is the most overvalued market in the country.
The third-quarter study, which examined 299 metropolitan areas in the country, puts the Naples market at No. 1, with homes being 84 percent overvalued. The Cape Coral metropolitan statistical area came in at No. 28 for the third quarter of this year, with home prices 51.9 percent over their value. That’s up from No. 35 in the second quarter.
The study doesn’t imply that there is a bubble or even that a correction in existing market prices is inevitable, said Philip Hopkins, managing director of U.S. regional services for Global Insight. Global Insight provides economic forecasting of countries, regions and industries using a combination of expertise, models data and software within analytical framework.
The study was a collaboration between Global Insight and Cleveland-based National City Corp.
National City operates a banking network in Ohio, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania, and other markets and does business in commercial and retail banking, mortgage financing, servicing, consumer finance and asset management.
Naples’ 84 percent overvaluation was up from 82.3 percent in the second quarter. It was followed by Merced, Calif., at 76.7 percent and Salinas, Calif., at 74.8 percent. Many other Florida markets, including Sarasota, Vero Beach, Fort Lauderdale, Ocala, Tampa, and Orlando also found a spot on the list.
But local experts and officials from the National Association of Realtors question the findings.
Jim Wallace, owner of Wallace Homes
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Lawrence Yun, economist, National Association of Realtors
Philip Hopkins, managing director of U.S. regional services, Global Insight
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If Naples is expensive and the prices in the market are high it’s because people who live here and want to live here can afford to pay those prices, said David Morgan, senior vice president and Southwest Florida complex manager for Raymond James and Associates.
“There is a built-in premium in the market prices. It is what it costs to live here based on the environment, the weather, the lifestyle and all that,” he said.
It’s because people who come to live in Naples have the option to choose where they want to live and they choose to live here and are willing to pay extra for it.
The study examined single-family home prices in the 299 metros that account for 80 percent of U.S. single-family housing market value over a period of 20 years from 1985 to 2005.
They found that 65 metro areas representing 38 percent of the total U.S. housing market are extremely overvalued, down from 67 metros in the second quarter.
Extremely overvalued is defined as markets in which home prices are 30 percent or more higher than what would be indicated by historical prices and trends, Hopkins said.
The study takes into consideration four key determinants, number of people per household, conventional mortgage rates, relative income level and a constant — a number determined based on a variety of factors that influence home prices. The constant varies from negative one to (positive) three for different markets based among other things on desirability, pollution level, cultural amenities, school systems and tax rates.
The purpose of the study is to identify areas where housing prices are higher than long-term supply and demand conditions would suggest, Hopkins said.
“We are not saying that there will be a price correction, just that there is the possibility of one,” he said.
Lawrence Yun, economist for the National Association of Realtors, disagreed with the study, its findings and even its methodology.
“They have been calling for ‘overvalued’ markets to see a correction for some time, but the markets continue to run up, so I question their forecast,” Yun said. “If you look at future dynamic housing markets and where they are located, South Florida and the Gulf region of Naples and the areas around it is where it is.”
Yun expects equity gains to continue, if maybe at a slightly more moderate rate. In 1980, when the median home price in San Francisco was $11,200, people thought the market was overvalued. Since then prices have continued to go up, Yun said, and the median price for a single-family home in San Francisco today is $722,000.
“I wouldn’t be surprised if in 50 years Naples is one of the priciest housing markets in the country,” Yun said.
Rather than resulting in the market being overvalued, the recent run in prices is a result of the market being undervalued in years before that, said Jim Wallace, of Wallace Homes, who has been building homes in the area for 15 years.
“The value of a home is whatever the consumers are willing to pay for it. It’s perceived value,” Wallace said. “I don’t believe any market can be overvalued as long as consumers are willing to pay whatever the amount is.”
He does agree that an adjustment may be coming, not because the market is overvalued but because there has been an excessive amount of speculative investment buying in recent years. A typical market sees about 6 percent to 8 percent of investment purchasing, whereas in the local market Wallace said he has seen numbers as high as 30 percent.
Many say that for the lifestyle and the amenities that the area has to offer, the prices are still comparable and even competitive to other areas. There is also a huge amount of wealth transference coming, said Tom Bringardner, general manager for Premier Properties.
“We have limited properties, limited beach access, waterfront property. It’s about supply and demand,” Bringardner said. “I am not seeing anything out of balance.”
Yet another local expert, Ross McIntosh, a Naples-based real estate broker, questioned the study and findings but on a different level.
“Who cares if it is?” McIntosh said, referring to the study’s finding that Naples is overvalued. “Isn’t value in the eye of the beholder?”
A buyer who is willing to pay a certain price for a property is not going to suddenly change his mind because someone thinks the market is overvalued.
There’s evidence that rates or appreciation are in decline, but not prices, he said. As long as the market adjusts itself, it precludes overvaluation.
When the market does adjust and rates do slow, McIntosh said, the only ones to be hurt will be those making unwise, speculative purchases, “impractical individuals who aren’t paying attention, who have overvalued expectations.”