The fuzzy sciences get a bad rap.  Everyone likes to knock economists, and their faith in efficient markets has been canonized in marginally funny jokes  (I'm thinking of leaving my husband, complained the economist's wife.  All he ever does is stand at the end of the bed and tell me how good things are going to be.) 

We also love to bash the popular press (infotainment hacks) and automated forecasts (love ‘em or hate ‘em you cant get away from Zillow conversations in the real estate blog world).

So what am I going to talk about today?  A CNN piece compiling economic data from Moody’s that makes some predictions about future home prices .  Why?  ‘Cause I love this stuff.  Just like Zillow gives you a potentially useful data point (not a certified appraisal upon which you’re going to write a contract) economic studies can give us a glimpse into how the factors that drive prices are lining up.  Plus – there’s an element of a self-fulfilling prophecy that comes from a forecast that is shotgunned out to huge swaths of the consuming public. 

So what’s next for real estate in ’07.  Well according to this study check out these markets:

1)  McAllen, TX
2) El Paso, TX
3) Albuquerque, NM
4) Salt Lake City, UT
5) Syracuse, NY
6) San Antonio, TX

The numbers aren’t too sexy, in terms of property appreciation – the best markets in the country are expected to rise at 7% to 9% in ’07.  But consider the fact that you’re leverage goes a long way in an undervalued market – which most of these are.  A zero down investment that appreciates at 7%...I’ll take that. 

...but some are starting to cool. 

This month Global Insight and the National City Corporation teamed up to publish a survey of regional housing market valuations.  Of the 317 metro areas evaluated:

• 219 (69%) showed a slowdown in appreciation over the past year
• (21%) showed outright declines in property values
• 79 (40%) qualified as extremely overvalued. 

See the full study here.

The most overvalued metro areas were clustered on the west and east coasts with California and Florida dominating the top twenty.  Naples FL had the highest overvaluation at 101.5%, followed by Bend OR at 89.3% and Salinas CA at 79.4%.

At the other end of the spectrum, seven of the ten most undervalued markets were in Texas.  College Station, home of the Texas A&M Aggies, was the most undervalued at -22.3%, followed by Dallas TX at -21.2%, Fort Worth TX at -19.3% and Houston TX at -17.3%.

Source:Global Insight/National City Housing Valuation Analysis

The paper also lists the major regional price corrections of recent years.  Texas also features heavily in this list; back in the mid 80’s the oil industry fueled a glut of investing that resulted in a speculative bubble which spectacularly popped when the oil market crashed.  Houston declined by 21% over 12 quarters.  Odessa, another oil hub, declined by 28% over 14 quarters. 

The current market condition in cities like Houston and Fort Worth has created an environment in which it is comparatively easy to find investment properties that generate positive cashflow at relatively low risk.  The ratio of rents to property values is high, and although there is always market risk the probability of an absolute decline in mean values from this level is relatively low. 

Investors in overvalued markets however should be wary.  Price dips might look like buying opportunities, but at these levels getting into the market feels more like speculation than investing.