Corvallis, Oregon Housing Market Ranked 9th Most Over Valued – Is that a Fair Assessment?
Recently, I answered a posted question on Trulia.com, which related to a CNNMoney.com post that ranks Corvallis, Oregon as the 9th most overvalued housing market. I’ve been asked about the study in person a few times… here’s what I think.
The study was done by IHS Global Insight and PNC Financial Services. The terminology used are “overvalued” and “undervalued”. The study ranks Corvallis, Oregon as the 10th most “overvalued” market in the study (there were only 399 markets included in the study—one has to wonder about the sample size) .
On one hand I’m completely aghast at the use of the terminology. The definition of market value is “a price at which buyers and sellers are willing to do business” (Webster’s ninth new Collegiate Dictionary). So, by the very definition of market value, how can a market be “over” or “under” valued? The published article is unclear about what the “percent” relates to (percent of what?). Is it the number of homes on the market that are “over/under valued?” Or is it the total number of homes in the community (if so, where did they get that “value” from)? Is it a comparison of number of home on the market or sold in relation to the median house price? None of the data I reviewed tells you what any of it really means. I searched the web in general and the web site for both PNC Financial Services and IHS Global Insights could not locate to the actual study.
With only a surface evaluation at my disposal, I have to say, I am more than a little skeptical about comparisons or rankings of such diverse cities. Seriously, Corvallis is in a list with Honolulu, Hawaii; Bangor Maine; and Bakersfield, California? Not much commonality. Perhaps it would make more sense to compare college towns to college towns (See the Coldwell Banker Home Price Comparison Indexes — there’s one index for College Towns and one for select markets) or towns with similar features and sizes.
The study says it is based on select data: “These judgments are determined by comparing median home prices, local interest rates, population densities and income, plus historical premiums or discounts that areas have exhibited over time.”
If you want to look at the “premiums” that Corvallis has to offer and length of time for the “history”, I have to say, Corvallis is not the same place it was 20 years ago. What are the “historical premiums or discounts”, and who is deciding which of these factors is significant. The term “overvalued” may be relative to who is doing the shopping and what the current “premium” list is…
How long is the history? It does not appear that there is any consideration for supply and demand; and important factor in a community like Corvallis.
Interest rates are very much based on national pricing (at least as long as Fannie Mae and Freddie Mac are still around) not locally set, so the rate climate really has a limited effect.
Corvallis is a very small market. Median home prices fluctuate (and drop) when the upper end of the market is slow and/or when there is limited inventory in the entry level available. For a significant portion of 2009, entry and mid level housing was more active than any other price point because of low interest rates, inventory and tax incentives. When more homes sell in the entry and median levels, the median and/or average is bound to move down. It is simply how the math works (Median is the center point between the highest high and the lowest low, more weight at the lower end, drives the median down.) Based on what I know about individual home sales and the market in which I work, I am not clear on how the median can be a valid statistical point in our market. The sample is simply too small.
The variance in the study between 2006 and 2010 for Corvallis is under 5%–many of the communities on either end of the scale exhibit much wider variances between the 2006 study and the 2010 study. That (almost 5%) is not much of a difference when you are comparing the same figure to other communities. To me it is an indication of a comparatively stable market (relative to the overall economic climate). Other communities, especially those where the bottom dropped out, show wider variations. The communities that are now rated extremely undervalued took big employment hits, have high foreclosure rates, did not control growth and/or a combination of those factors.
Do not get me wrong. I do not think that any community that is immune to the impact of the current economy. However, I do not think that we are in for the fall that one might derive from this report. Jobs will determine that.
It was not until this last housing cycle that homes were considered short-term investments. In the past, most investors were looking at purchasing investment properties on the basis of cash-flow. Appreciation was a bonus. Flipping was done only by the most experienced investors and with appropriate types of financial backing.
The last paragraph of the article is the most significant. “The bottom line, at least for a few years, is that the average buyer should forget about home purchases as investments. The good news is that, long-term, their home values should appreciate.” That sounds more like a return to normal to me.
I’d like to know what you think? Please post your comment or question.
AJ Campbell says
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behrens says
AJ–
This one is pretty long and involved, but important info. Please read the whole thing when you get some time.
Thanks for the positives.