Homes in Bubble Regions Remain Wildly Overvalued

If you own a home in a former bubble region like California or southern Florida, there's bad news… and really bad news.

And they suggest that it is still way too early to go bargain hunting in these markets, although -- of course -- there is always the occasional deal around.

The bad news is fresh market data published Monday night by real-estate Web site Zillow.com. They show prices, as expected, kept slumping through the end of last year.

But the really bad news is that, even after a year of misery and falling prices, homes in many of these regions still aren't cheap. They remain wildly overvalued compared to average personal incomes.

There is a strong long-term correlation between the two figures. And in many regions, house prices would still have to fall a very long way to get back into line.

How far?

Try around a third in Florida and Arizona -- and closer to 40% in California.

Yes, from here. The long-term chart for California is shown below.

Even if house prices stabilized, it would take a decade or more for rising incomes to catch up.

The data on median house prices and per capita personal income in these states have been tracked by Karl Case, economics professor at Wellesley College. (He is one half of the duo behind the closely-watched Case-Schiller real estate index).

Professor Case's numbers ran through the end of the third quarter. I decided to see how they might look today, using Zillow's data for the fourth quarter.

The company hasn't posted statewide data, but the price falls across the many cities it tracks give a pretty strong picture. From these I assumed, for the sake of calculations, that California prices fell 8% last quarter from the third quarter, a huge number by historic measures but not out of line with Zillow's data. For Florida and Arizona I assumed declines of 5% and 5.5%. You could use other, more modest estimates for the recent declines: They won't change the outcomes much. I also assumed personal incomes in these states rose in line with recent and historic averages."

The results? In all three markets, the prices are well off their peaks when compared to incomes. But they remain far above historic averages.

Median prices in California peaked in 2006 at 13.3 times per capita incomes. Hard to believe, but true. They may be down now to about 11.1 times.

But that's still way above the ground. Throughout most of the 80s and 90s they ranged between six and seven times incomes.

Just to get down to seven times incomes, prices would have to fall 37% tomorrow.

Those who bought at the peak of the cycle may be pinning their hopes instead on "incomes catching up" instead. But they had better be patient. Even if house prices stayed exactly where they are, it would take around 10 years for rising incomes to bring the ratios back into any sort of alignment.

And it would take even longer before prices started to look very cheap again.

That's based on average personal income growth of 4.6% a year in California and Florida and 4.2% in Arizona.

Yes, these are projections and estimates. Time and chance will play their usual roles. And there will doubtless be different pictures within regions of the same state.

Nonetheless the overall picture is pretty clear. And, if you are a homeowner in any of these regions, none too appealing.

Write to Brett Arends at brett.arends@wsj.com