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O.C. homes seen as 13% too cheap

December 11th, 2008, 2:02 am · 50 Comments · posted by Jon Lansner/ocregister.com

Yes, your eyes aren’t foggy. Economists from Global Insight and National City say their real estate math machines saw Orange County housing “fairly valued” in third-quarter as values ran 13.2% below what — theorhetically — local homes should sell for.

Global Insight/National City economists track home valuation nationwide by mixing pricing data with interest rate, income and other demographics data. And for the third-consecutive quarter, this pair’s concluded that O.C. homes sell for less than the assumed true value — this time by the largest undervaluation margin since 2001’s fourth quarter, just after the 9/11 terror attacks. See chart. Click on it to see larger version.

A key reason for the undervaluation is obvious: O.C. home values are off 23% in a year, by Global Insight/National City math — and down 35% from the 2006 second-quarter peak.

Ok. Then explain why do Chapman U. professors see O.C. home prices off 7% more in ‘09? Well, undervalued doesn’t mean it’s going to get better soon. In the last downturn, Orange County homes were undervalued by this Global Insight/National City math  from 1993’s second quarter to 2002’s second quarter. Yes, nine years. We’re nine months into this valuation cycle. By the way, undervaluation peak — Does this measure peak? Or does it bottom? — the last time was at 29.4% in 1998’s first quarter.

Here’s what Global Insight/National City says about the national picture: “According to our latest analysis, the incidence of extreme overvaluation has become negligible. Only 3 markets met that criteria during the second quarter: St. George, Utah; Atlantic City, New Jersey; and Bend, Oregon. That compares to 4 extremely overvalued markets during the second quarter and 5 during the first. Overvaluation was most pervasive during the fourth quarter of 2005, at which time 52 metro areas were considered at risk for major price declines.”