Wow, what a difference four years makes!
There was a fascinating article on CNNMoney.com recently that compared a nationwide housing price valuation study done in 2006 to one recently released here in the Year 2010.
Four years ago, when real estate prices were rising like there was no tomorrow, National City Corp. and IHS Global Insight did an analysis of 299 markets in the United States and determined that homes were overvalued in 87 percent of the markets.
A new analysis, done by PNC Financial Services — which absorbed National City — and IHS shows that a big majority of U.S. markets, 242 out of 330, are now UNDER-valued. What’s kind of interesting is that the markets that were ranked among the most overvalued four years ago are now among the most undervalued.
This illustrates what market timing expert Robert Campbell calls the “pendulum” effect. He points out that the further the pendulum swings one way, the further it will go in the other direction once it does change direction. In other words, the markets with the biggest overvaluations don’t just tend to undergo a correction; they go through an OVER-correction.
The same thing happened in the stock market when it kind of crashed in 2008. Sure, stocks were overvalued prior to that, but the overcorrection brought even some blue chips into the ridiculously low-priced area. In the stock market, that has occurred before. But it might have taken the bubble of crazy proportions we saw in the last decade for us to realize that it could truly apply to real estate, too.
It’s a lesson we should take note of and remember for the next bubble. Or if you’re in Canada, think about how it might apply to the cycle you are experiencing now.
What this means in the U.S. right now is that, thanks to overcorrection, homes are undervalued in 242 of the markets in the U.S. That means homes are available at bargain prices. And it’s logical to think that there will be another pendulum swing, meaning the places where homes are the MOST undervalued will, in theory, see the greatest appreciation.
According to the CNNMoney article, Richard DeKaser — the real estate expert who did the report for National City — said the original report predicted with uncanny accuracy what would happen when the bubble burst. According to the article:
“At the risk of immodesty, I must say the whole model has performed too well to believe,” said DeKaser.
“I’ve done some research that shows when you get a bubble, you don’t just return to normalcy,” he added. “You go past normalcy for a long period of undervaluation.”
It’s a big lesson. And in four years, it will be interesting to again see where the pendulum is.
For a complete table of over- and undervalued homes in the 330 U.S. markets included in the report, visit CNNMoney.com here.