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Is the housing market's overvaluing issue being overstated?

“A million-dollar home in San Francisco is very different from a million-dollar home in Columbus, Ohio,” CoreLogic Chief Economist Mark Fleming said.

Despite rapid rates of residential property value appreciation and whispers of the housing bubble's second coming, at least one market analyst believes there is still room for plenty more price growth.

In a recent report titled "Popping the Housing Bubbly Theory," CoreLogic Chief Economist Mark Fleming argued that the bubble in fact exists already, based on the premise that national price gains have generally exceeded the rate at which rents have grown. But Fleming also says there's more to the bubble equation. According to a Mortgage News Daily report, the economist believes renting and owning to be "economic substitutes," and therefore income growth must be weighed in relation to each. The primary difference in his take on the situation lies in his belief that sustainability is still achievable even at the current rates of price climbing. The further the gap between buying and renting affordability widens, Fleming argues, the more significant the income factor becomes.

"A significant difference in pricing should draw more demand to the less expensive option, therefore driving up pricing and removing the significant difference," Fleming said. "This constant reversion to equilibrium between the two substitutes means any significant difference must be due to irrational exuberance on the part of the homeowner or renter."

Apples and oranges 
Fleming went on to argue that because of the relationship between homeowner incomes and mortgage payments, prices in certain metro areas have already reached their proverbial ceilings because to climb any further would be to eliminate affordability for residents whose salaries have not grown at the same rate. In other words, unless income growth unexpectedly picks back up to mirror the appreciation rates, demand will begin to wane and prices, inevitably, will have to fall back to more affordable levels.

Of course, the direct relationship between incomes and home prices means that value is gauged differently in different markets. Where people earn more, houses can be sold at higher prices while remaining relatively affordable.

"A million-dollar home in San Francisco is very different from a million-dollar home in Columbus, Ohio," Fleming said.

Fleming went on to conclude that nationally, homes are actually undervalued relative to income, and that simply comparing residential property values to rent prices does not sufficiently underscore the sustainability - or lack thereof - of a given market.

"Doing so misses the point made earlier that much of the recent house price appreciation is a result of market correction for the significant undervaluation caused by the price declines in the late aughts," Fleming said. "Instead, analyzing home price levels relative to fundamental prices leads us to conclude that there is no need to fear a bubble for at least a few years to come, if at all."

Still swaying the stats 
A second CoreLogic economist, Thomas Vitlo, authored a second piece titled "Disproportionate Recovery in Housing's Freshman Year of Healing," which focused primarily on the distribution of new home sales on national and local market levels. Among the findings, Vitlo explained, was that new home sales continued to represent a disconcertingly small portion of the market's overall activity. Cash sales, sales of distressed properties and investor activity continued to account for more of the transactions in 2013 than is typically considered representative of a healthy market. And while new home sales rates have been on the rise, they still represented just an 8.9 percent share in December 2013 and Vitlo notes that they are not at all evenly distributed. Many local markets, particularly in the West, remain heavily dependent on and influenced by investor activity.

Basing his conclusions on Census data, Vitlo determined that states in the South are faring better in terms of new sales rates than those in the Northeast. In Kentucky, Georgia and Oklahoma, the new home share of overall sales have increased by 2.4, 2 and 1.6 percent, respectively, while in Connecticut and New Jersey that segment of market activity actually decreased to close 2013.

Housing markets in the South are considered relatively inexpensive by comparison, but the discrepancy may be the result of a more significant difference in the way states process foreclosures. Connecticut and New Jersey, among others, are so-called judicial states, meaning distressed homes must make their way through the court system before being officially accounted for - a process that can be inefficient and ultimately skew statistics because of the backlogs that are created. Similar trends have been seen, Vitlo noted, in many Midwestern states that are also still slowly recovering from high rates of foreclosure.

Not everyone is buying the CoreLogic theory, however. A recent release from CF Funding called into question the viability of Fleming's and Vitlo's contentions, based mostly on the fact that appreciation trajectories make it exceedingly difficult to argue any market is underpriced. With the majority of local real estate prices continuing to rise or maintain their current levels, a common takeaway is that properties are generally overvalued - regardless of the source of that value.