''Early Stages Of Adjustment' For 'Bubble Zones'

CNN has a new report out. "Although many overheated U.S. housing markets lost steam during the third quarter of 2005, most still grew less affordable. That's according to the a real-estate market research provider. Through the third quarter of 2005, 79 of the 100 surveyed markets had gotten more expensive." "At the top of the list for overpriced cities was Santa Barbara, Calif. at 86 percent overvalued. The average home there should cost $308,900, according to the (research). Instead it sold for $573,100. Overall, 37 markets were found to be severely overpriced, which meant that they were at least 15 percent more expensive than they should be." "The level of over-valuation matters in three ways, according to Ingo Wenzer. The higher it is, the greater the risk of it correcting; the greater the correction can be; and the longer it will take to return to present-day prices after they fall. 'Once markets are overpriced by 40 percent or so, the risk is pretty high and the adjustment can take five to 10 years,' said Winzer." And from the Financial Times. "Data this week will shed needed light on the state of the US housing market. Figures from the NAR on Wednesday are expected to show a third consecutive monthly fall in existing home sales. The Commerce Department is expected later in the week to report a similar drop in sales of new homes and figures are due from the MBA. If the reports are as downbeat as expected, they will add to evidence that the US housing market is beginning to cool." "The ratio between average income and the costs associated with buying a home has risen to record levels. 'Strong price growth momentum has resulted in very high prices relative to incomes across the country,' says (economist)Ian Morris. Mr Morris says a 'bubble zone' has been created where house prices are overvalued by 35-40 per cent, equivalent to $6,000bn." "Merrill Lynch writes in a note that 'substantial evidence has emerged that the US housing market could be in the early stages of an adjustment process similar to that experienced by the UK.' 'There are already signs of softening in the new homes market in the US if you look at prices and the number of sales,' says David Bowers, chief global investment strategist at Merrill Lynch." "The University of Michigan consumer sentiment study shows that the proportion of Americans who believe it is a bad time to buy a house 'because prices are high' is at a level not seen since the early 1980s. The NAR, which has an interest in being optimistic, is predicting that house price inflation will slow from 12.9 per cent last year to 5.1 per cent in 2006."