Fitch Claims Home Prices Overvalued Given Unemployment Data

By Stevie Duffin Updated on 4/18/2013

By Daniel Duffield

For the week ending on April 13, unemployment claims increased by 4,000, removing some of the market optimism that had been present after the 42,000 drop in jobless claims last week.

In the latest measurement, roughly 352,000 jobless claims were reported, rising from the revised estimate of 348,000 a week previous.

Currently, the shifting four-week average for jobless claims, which tends to reflect the market’s employment cycles more accurately, increased by 2,750 to 361,250 total unemployed filings.

Fundamentally, unemployment claims vary from week to week, thereby causing each weekly report to be somewhat less reliable than those that illustrate more prolonged market trends. However, coinciding with the sluggishness within the job market, home prices are continually increasing.

Due to the fact that the nation’s unemployment data typically has a direct and noticeable effect on the housing market, Fitch Ratings is taking a not-so-optimistic approach to the recent rise in home values, even going as far as to label them overestimated.

Fitch Ratings disclosed a note on such research, stating that in spite of the persistent increase of the Case-Schiller Index, the company’s view on current home prices, adding that they see an overvaluing of approximately 10% in effect with a 2% nominal overestimation when factoring in inflation and the upward drive of prices.

In clarifying this approach to anticipating home price trends, the company stated that several critical economic factors that are inherently connected with housing have not been moving in correlation with the current rise in home prices, one of these prime factors being unemployment.

According to the ratings firm, labor participation has fallen to the lowest point within the past 30 years, despite the progress made for headline unemployment. When correcting by taking into account participation rate, unemployment averages approximately 10% across the U.S., and as a result, Fitch remains modest in terms of home pricing.

With such overvaluing of home prices, one can only hope that another housing bubble does not form, although certainly the effects would not be as devastating as the last.