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Is Your House Overvalued?

As the the stock market has faltered, investors have seen real estate as a safe bet. But the latest issue of Smart Money Magazine reveals homes are overvalued in many markets.

Smart Money magazine's special contributor Vera Gibbons visited The Early Show to discuss what that means for the average homeowner.

Real estate is the one investment that's seen consistent growth over recent years. Housing prices have shot up an average of 39 percent in the past five years. The question now: is this boom going to last?

Gibbons says all of the fundamentals are there for a continued surge — interest rates are low, more immigrants are moving to the country and inventory is tight. But, she says, it's also possible to argue that some housing markets are poised for a decline.

There are two big red flags that homeowners should see as indicators that their homes might be in one of these markets. First, take a look at the area's job market. Employment numbers and housing values are linked more closely than many people realize. Gibbons suggests observing any unusual activity in the local job market. She says if you notice factories shutting down or companies going out of business, it probably doesn't bode well for the area's real estate.

The second thing to watch is the rental market. Rising vacancy rates or special offers for renters are warning signs.

Smart Money teamed up with a real estate consultant firm to look at the nation's top 100 housing markets. Using local income levels they set an "equilibrium price" on homes — what a house should cost in the area — and compared it to actual home prices. They discovered that 47 of the 100 markets are overvalued, meaning actual prices exceeded equilibrium by more than 10 percent. This also means that, in theory, home prices/values in these markets could fall or level off.

However, an overvalued home doesn't automatically spell trouble. If the area is economically strong and has room for continued growth or is attracting more residents, prices probably won't fall. As a matter of fact, they could climb higher. Good examples of these markets are Las Vegas, Nev.; Madison, Wis.; Miami, Fla.; Portland, Ore.; and Stockton, Calif.

Smart Money did pinpoint five markets they see as real estate risks. In these places, homes are overvalued by 17 to 46 percent and have the worst job growth of the top 100 markets. This is almost a guarantee that home values will fall. These cities are:

  • San Francisco, Calif.:
  • The city is in a post-tech funk. The retail industry is flat and tourism is down. Labor unrest in the docking industry is also a concern.
  • Seattle, Wash.: The local economy hasn't filled the void left by Boeing.
  • Gary, Ind.: Steel mills have closed in a largely undiversified local economy.
  • Denver, Colo.: The inventory of unsold homes is increasing.
  • New York, NY: The city has a $5 billion deficit, and the financial district is on its back.

What should homeowners who find themselves in a risky area do?

Gibbons has three suggestions.


  • Consider locking in gains by selling your home and renting in a softened market.
  • Sell and downsize to something smaller — lots of aging baby boomers are going this route.
  • Borrow against your home's boosted value and get a home equity loan.
On a brighter note, Smart Money also picked five very solid markets where homes are currently undervalued or at fair value and where job growth numbers are strong enough to point to good times ahead. Gibbons calls home values in these markets "up and comers":
  • Sioux Falls, S.D:
  • The power of cheese will give a boost to this city. A $40 million cheese plant is on the way.

  • Jacksonville, Fla.:
  • Unemployment is low, and there's a steady stream of newcomers.

  • Charleston, S.C.:
  • Unemployment is about two points below the national average and tourism and shipping are strong in the city.

  • Tallahassee, Fla.:
  • It has strong retail and commercial construction.

  • Nashville, Tenn.:
  • Joblessness is under four percent in the area and hiring is expected to rise.


Gibbons's suggests homeowners know whether their homes are overvalued or undervalued and determine which way the value may be heading. But, no matter what the market does, she says to remember that while the term "housing bust" is scary, it's also relative. History shows that market declines are never, never as steep as the run-ups that preceded them. So, no matter what, you'll probably wind up ahead.