by Calculated Risk on 8/18/2006 01:13:00 AM

One of the persistent myths is that the housing bust will be local, or only on the coasts. Some analysts have tried to determine "fair value" for various markets, like in this article: Coastal housing markets still way overvalued.

The article suggests housing prices in Dallas are actually 14% undervalued.

Click on graph for larger image.

This graph shows nominal and real prices for Dallas (based on OFHEO) since 1987.

Obviously Dallas has not participated in the housing price boom of recent years. In fact real prices are 18% below 1986 prices!

Does that mean Dallas will not experience a housing bust?

It may surprised some people, but Dallas is already in the midst of a housing bust.

UPDATE: Apparently it would surprise Dallas Fed President Richard Fischer. From a speech on Wednesday (hat tip Mark Thoma):

The key area of concern in the real estate markets is the housing market. You know the facts here, so I’ll make this brief by repeating what a friend who has been a major homebuilder since 1973 recently told me: “This is the roughest, most sudden correction we have ever seen in the housing market.”

It may comfort you to know that of all the markets in America, Texas’ is among the most resilient. In fact, so far this year, single-family permits are up 11 percent from their year-ago pace—the third fastest growth rate among the 50 states and a sharp contrast to the 7 percent year-to-date decline for the U.S. as a whole. Much of our state’s strength reflects the pro-growth climate and low land prices that Texas has to offer.

Ahhh, if Texas is "resilient", imagine what will happen everywhere else! Back to orginal post:

From the Dallas Morning News: Foreclosures soar in North Texas

Residential foreclosure postings are at record levels ...

More than 3,800 houses are threatened with foreclosure next month in the Dallas-Fort Worth area. And for the first nine months of 2006, more than 28,000 home foreclosure postings have been recorded.

"This is bringing back nightmares of 1988 and 1989," when thousands of Texas homeowners lost their properties during a regional recession, said George Roddy, president of Addison-based Foreclosure Listing Service.

"The average number of postings in 1989 was about 2,000 a month," Mr. Roddy said. "And that is when we saw a massive devaluation of residential properties in some areas."

Housing analysts worry that if foreclosure rates stay at current levels, the overall housing market will suffer. This time, however, instead of a recession, poor financial planning and rising living expenses appear to be putting record numbers of North Texans out of their homes.

Prices probably will not fall as much in Dallas, as in Florida or California, but the large number of foreclosures will certainly put pressure on prices.

And notice Mr. Roddy's comment that 1989 saw "massive devaluation of residential properties", and yet the OFHEO series only shows a 13% nominal price drop for Dallas. That is key for housing. A seemingly small drop in prices will be have a significant economic impact and be perceived as "massive".

And finally, Dallas is not having a recession. Nor did Dallas see significant investor and second home buying. The Dallas bust is solely the result of excessive leverage and nontraditional mortgage products. And that should send a chill down the spines of every leveraged homeowner in the "bubble" states.

The housing bust will be nationwide.