America's Most Overpriced ZIP Codes

In San Jose, Calif., home to Silicon Valley and some of the highest home values in the country, a bumper sticker reads, "Dear God, one more bubble before I die."

Chances are the car's driver lives in Willow Glen, a neighborhood with a small-town feel, Spanish-style single family homes and a main street with sidewalk cafes and locally owned shops.

To live there, residents are paying the city's highest prices relative to what they could pay to rent similar properties in the same area. When you compare mortgage payments to the value of a similar home on the rental market, the price to buy is 26.1 times higher, one of the biggest differences in the country.

Willow Glen is one example of a neighborhood where homeowners are still taking chances on future appreciation--and paying a premium above and beyond their neighbors for that confidence.

Still, it's not as overpriced as New York's TriBeCa (10013) or Boston's Chinatown (02111), where demand for high-end condos, new development and proximity to downtowns have pumped up prices.

Behind the Numbers

While real estate markets may be slumping across the country, there are plenty of neighborhoods with similar characteristics. These include downtown Seattle (98104), Mission Hills, San Diego (92103) and Coronado, Phoenix (85006).

Boston

To find them, we used data from Hotpads.com, an aggregator of rental listings from brokerages and real estate investment trusts, as well as home sales offerings from multiple listing services and individual brokers.

In a report for Forbes.com, Hotpads.com produced a price-to-earnings spread for each ZIP code in the nation's 40 largest cities by comparing rental costs with buying costs for similar properties, based on number of bedrooms, location and price per square foot.

Price-to-earnings, or P/E, expresses how much one has to pay for each dollar of return. A neighborhood with a high P/E is overvalued because a buyer is getting a low return based on costs--and paying a huge premium to live in area relative to how much it would cost to rent a similar property there. In TriBeCa, for example, which is No. 1 on our list, the P/E of the measured property is 36.3.

San Francisco

A high P/E can be a sign of an investment being overpriced, but a rock bottom P/E doesn't mean a bargain. In fact, when you get into the single digits, you're usually buying a weak investment in an area few are interested in.

Detroit's 48235, around 7 Mile Road, for example, has a P/E of 3. It is inundated with foreclosed properties and houses going for as little as $25,000. It's hard to put an exact epicenter on Detroit's real estate crash, but this neighborhood is in contention.

High-Priced Properties

Instead, mini-bubbles are created when buyers invest in robust areas where they expect homes will continue to rise in value. If their gamble pays off and the neighborhood appreciates further, today's overpriced buyer is tomorrow's smart investor.

A neighborhood with a very high P/E, like West Hollywood, Calif., where rents trail prices by 30 times, has an expectation of future price increases baked into the cost of buying. It's not prime West Hollywood, but since it's on the edge of nicer parts of town and of affluent neighborhood Los Feliz, it's been attractive to speculators, despite the cost.

But expensive does not mean always mean overpriced.

New York City

Limestone townhouses on the Upper East Side of Manhattan, for example, are listed for ever-dizzying prices. Financier J. Christopher Flowers bought a $53 million townhouse on East 75th Street in 2006, and sold a smaller East 73rd Street townhouse undergoing renovation for $23 million in 2007.

Expensive? Yes. Overpriced? Not so much.

Consider that a five-bedroom mansion on East 74th Street that once belonged to Eleanor Roosevelt is currently listed for $60,000 a month. Prices may be tops in the city, but prime rental prices are peerless as well.

Instead, the country's most overpriced areas are ZIP codes like San Francisco's Outer Sunset neighborhood, 94122, which, given its location near the Pacific Ocean and on the south side of Golden Gate Park, was during the most recent boom widely thought to be up-and-coming.

Median prices surged from $560,000 in June of 2003 to a peak of $771,000 in March of 2008, based on Trulia.com price data drawn from California's multiple-listing service.

Sometimes, however, betting on price appreciation doesn't quite work out, and when markets start to soften, speculative areas are often the first to take a hit.

San Francisco as a whole has declined 6% over the last year, but prices in the Outer Sunset have declined 10%, dropping to $692,000. Based on asking prices and asking rents, though, the market still has a way to fall before reaching equilibrium.

Investors and homeowners in the other nine neighborhoods on our list are likely hoping for immunity from this trend.