Decline in home prices hits overvalued markets hardest

House prices in extremely overvalued U.S. metropolitan areas declined nearly 37 percent on average between 2005 and the fourth quarter 2009 when prices stabilized, according to the fourth quarter 2009 report of House Prices in America, the quarterly update on real estate values from IHS Global Insight.

At the peak of the bubble, 137 metro areas of the 330 in the study were either extremely or significantly overvalued. There were no extremely overvalued metro areas at the end of 2009. In more than half of the 52 U.S. housing markets found by IHS Global Insight to be extremely overvalued in 2005, prices appreciated more than 90 percent from when the bubble began in early 2002.

The metro areas of California and Florida dominated the extremely overvalued list at the end of 2005. Overall, 10 metro areas have seen prices decline by more than 50 percent from their peaks, led by Merced, Calif., down 64 percent and including Las Vegas, down 58 percent. There are now 31 metro areas with declines greater than 40 percent from their peaks.

For the fourth quarter 2009, prices fell by only 0.1 percent quarter-to-quarter, according to the Federal Housing Finance Agency, indicating that the housing market is close to achieving stabilization. The number of markets showing a price decline from the third quarter to the fourth was 244, up from 164 markets from the second quarter to the third.

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