'Overpriced' housing gets more overpriced

NEW YORK (CNNMoney.com) - The rich have gotten richer, at least when it comes to home prices, according to a study released Monday.

The most overvalued housing markets in the United States recorded much higher price increases during the first quarter of 2006 than the least overvalued markets, according to the latest analysis by National City Corp, a financial holding company, and Global Insight, a financial information provider.

Worst prices Where the home prices are least affordable Metro area  Percent overvalued Q4 2005  Median home price Q1 2006  Percent overvalued Q1 2006  Naples, FL  93.5%  $383,000  102.6%  Salinas, CA  81.4%  $608,600  79.1%  Port St. Lucie, FL  72.8%  $240,800  77.4%  Merced CA  72.9%  $291,300  77.0%  Bend, OR  65.2%  $276,100  76.4%   Source:  National City Corp

Best buys The markets where houses are least overpriced Metro area  Percent undervalued Q4 2005  Median price Q1 2006  Percent undervalued Q1 2006  College Station, TX  22.1%  $94,200  23.7%  Dallas, TX  18.8%  $129,000  18.9%  Ft. Worth, TX  17.6%  $105,500  18.5%  Houston , TX  16.6%  $110,600  15.8%  Killeen, TX  11.7%  $93,000  15.1%   Source:  National City Corp

In the 50 most overvalued markets, prices increased 2.5 percent from the fourth quarter to the first, an annualized rate of 10.1 percent. In the 50 least overvalued markets, prices increased just 0.7 percent, an annualized rate of 2.7 percent.

Overall, U.S. home prices rose at an annualized rate of 7.3 percent for the quarter.

The report surveyed the largest 317 U.S. real estate markets. It determined what home prices should be, controlling for differences in population density, relative income levels, interest rates, and historically observed market premiums or discounts.

Markets with valuation premiums above 34 percent were judged to be severely overpriced and at risk for price corrections.

Take Naples, Florida, the most overvalued U.S. market by National City's estimate. By the last quarter of 2005, the median price for a home, at $367,200, was about 94 percent over what National City judged it should be.

But by the end of the first quarter, the median home price in Naples was $383,000, an increase of more than four percent in just three months. Naples real estate now sells for more than double what it should cost.

Compare that to the least overvalued market, College Station, Texas, where prices are more than 23 percent below what National City estimates they should be. Despite that, prices still fell last quarter, from $95,000 to $94,200. Ft. Worth and Killeen, Texas, and Wichita, Kansas, are other very undervalued markets where prices declined.

Port St Lucie, Florida, Merced, California, and Bend, Oregon, joined Naples as overpriced cities where prices rose substantially.

Some places, of course, bucked this national trend. Salinas, Santa Barbara and Sacramento, all in California, are all among the top 50 overvalued cities where prices dropped.

And El Paso, Houston and New Orleans, all among the least overvalued cities, reported substantial price appreciation. El Paso prices sprouted at a rate of nearly 25 percent on an annual basis.

According to Richard DeKaser, National City's chief economist, what usually happens when markets are returning to normal is that extremes of the market - the low and high ends, should move back toward the average; overvalued markets should rise slowly, if at all, and undervalued ones should shoot up.

Just the opposite is happening.

Overall, 39 percent of the 317 markets surveyed were judged to be severely overvalued. That's up from 36 percent of markets in the last quarter of 2005.

DeKaser did find some evidence that prices may be ripe for a correction. A year ago prices in overvalued markets were going up even quicker than they are today, indicating they are pointing to a change of direction. That doesn't mean that a normal, balanced market is right at hand.

"We've got a long way to go before we're out of this market," says DeKaser.