Fewer Home Markets Are Overvalued, Study Finds

There were fewer overvalued U.S. housing markets in the third quarter, but 38% of the top 299 metropolitan markets remained at risk of a sharp drop in prices, including 25 in California, a study released Friday indicated.

The report from financial holding company National City Corp. and economic analysis firm Global Insight said the number of “extremely overvalued” markets declined to 65 in the third quarter from 67 in the second quarter.

Home prices have risen more than 55% on average over five years, according to government data.

Some economists fear that the priciest markets are overheated and on verge of a correction that may hurt the economy.

According to the study, homes in Massachusetts are returning to more normal valuations while those in Florida are still red hot.

Naples, Fla., was the most overvalued with an 84% difference in average market price and fair price on a home, the study said. The average market value for a Naples home was $335,183 in the third quarter, compared with a fair value of $182,141.

California markets on the list of 10 most overvalued were Merced (76.7% overvalued), Salinas (74.8%), Stockton (72%), Madera (69.9%), Santa Barbara (69.7%), Modesto (66.9%), Napa (65.5%) and Riverside (64.8%).

Los Angeles was considered 54.2% overvalued, San Diego 54.8% and Santa Ana 43.6%.

The report said housing markets outside of the “frothiest” areas, showed signs of cooling.

Four cities were added to the list of extremely overvalued markets -- Honolulu; Phoenix; Orlando, Fla.; and Pensacola, Fla. Of the significantly overvalued metro housing markets, 41 were in California and Florida.

Six cities were removed from the list: Essex, Mass.; Worcester, Mass.; Jackson, Mich.; Bay City, Mich.; Portland, Maine; and Charlottesville, Va.