HOME BUYERS BEWARE: L.A.'S HOUSING MARKET OVERVALUED.

Byline: GREGORY J. WILCOX

Prospective home buyers receive grim news on a regular basis. Here's a dose for homeowners: Your price-to-fantasy gap is growing.

In the past five years, Los Angeles County's housing market went from being undervalued by 12 percent to being overvalued by 48 percent.

The news could be grimmer, though. Eleven other markets in the state, including Riverside, Salinas and Chico, destinations not noted for their glam factor, ranked ahead of Los Angeles in terms of being overvalued, according to a study of 299 cities across the United States by National City Corp.

The study covered 80 percent of the nation's single-family-housing market. It calculated what houses should be valued at - not the selling price - in each market and what the values actually averaged in the first quarter.

Viewed from another perspective, the results show Los Angeles is the nation's 20th-most-overvalued market on the National City list. In 2000 the city ranked 223rd. During the first quarter, a house should have been valued at $274,957, but it was actually $405,668, according to the study.

If you own a home in Santa Barbara, one of the most expensive cities in California, it's overvalued by 69 percent, topping the list. Five years ago it was undervalued by 10 percent.

At the bottom of the list is College Station, Texas, home to Texas A&M, the Aggies and Bob Knight. The median value there is $63,500. That market is undervalued by 19 percent and has pretty much been that way since 2000.

What does it all mean?

What's gone up is going to come down. Maybe.

And what's gone down might not come back up, for a while.

Richard DeKaser, chief economist at the Cleveland-based financial holding company, notes that markets with valuation premiums above 30 percent are likely at risk for price corrections.

This assumption is based on the typical degree of over-valuation that preceded the 63 known local market price declines since 1985, he notes.

The most recent price correction in the San Fernando Valley began in November 1989 and lasted until February 1997.

``If home prices are overvalued, then, by definition, the risk of a price correction is high,'' DeKaser said. ``To the extent that economic growth remains strong, however, these risks will be greatly reduced.''

Put together the first and last parts of that last sentence and it adds up to a soft landing.

Economists who track Southern California continue to repeat the mantra that the economy is in pretty good shape and looks like it's going to stay that way for a while.

DeKaser agrees.

He said that from 1995 to 2002 the Los Angeles market was undervalued coming out of the recession and was bound to improve because fundamentals, like interest rates and demand, were favorable.

The real heating started in the 2003 first quarter when the market was overvalued by 8 percent. The next year it was 22 percent, then it jumped to 48 percent this year.

It's a feedback frenzy.

``Rising prices confirm the expectation that prices will rise, which in turn stimulates demand, which in turn contributes to rising prices,'' DeKaser said.

Daniel Blake, director of the San Fernando Valley Economic Research Center at California State University, Northridge, said National City's take is probably right.

``Five or six years ago we were probably undervalued. We were still climbing out of the recession ... where we lost about a third of the (housing) value,'' he said.

Blake also noted that after prices reached a record level last summer, they retreated for the rest of the year.

And that will probably happen again.

``It's traditionally a high (priced) market, both in the Valley and Los Angeles, in July,'' he said.

And DeKaser believes that the valuation trend now in place for Los Angeles will likely last a little longer.

Gregory J. Wilcox, [phone]

greg.wilcox(at)dailynews.com