A leading real-estate firm says houses are cheap – relatively speaking – in the Providence region.

Home prices in the Providence-New Bedford-Fall River metropolitan area are 13% undervalued relative to the economic fundamentals of the region, significantly more than the 7% undervaluation nationwide and 8% undervaluation in Boston, according to an analysis by Trulia, the real-estate data firm.

Jed Kolko, Trulia’s chief economist, explained the methodology in a blog post:

[W]e assess whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. Incomes determine how much people can pay for housing, and price increases aren’t sustainable if they push prices too high relative to incomes. Rents reflect how much people value housing even if they won’t benefit from price appreciation (as renters don’t, but owners do); the price-to-rent ratio is like the price-earnings (P/E) ratio for stocks. Using data from multiple sources … we create several measures of fundamental value and combine them in order to calculate how overvalued or undervalued home prices are relative to fundamentals.

Home prices in the Providence area have fallen a long way since the height of the housing bubble: Trulia estimates prices were 51% overvalued during the middle of the 2000s, while they were 39% overvalued nationwide. (The Providence metro area encompasses all of Rhode Island plus Bristol County, Mass.)

Housing prices are below their fundamental value in 91 of the nation’s 100 largest metro areas, including Providence, according to Trulia. The only places where homes are estimated to be overvalued are in California, Texas, Oregon and Hawaii.

There aren’t exactly a flood of new people arriving in the area to snap up those supposedly cheap houses.

Trulia reports Providence was the sixth-slowest-growing major metropolitan area in the U.S. last year, eking out a population uptick of 0.1%, compared with 3% in fastest-growing Austin, Texas. Providence also has some of the oldest housing stock in the country: 6.6% of the homes for sale in March were built before 1900.

• Related: Study: Cost-of-living in Providence 23% above national average (Feb. 20)

This shows home prices in Rhode Island (blue) and nationwide (red), indexed to show the growth since 1980.

Rhode Island saw a much more bigger increase in housing prices than the nation as a whole from about 1985 to 1990, then stagnation throughout the 1990s following the banking crisis, then another rapid run-up from 2000 to 2006. Home prices in Rhode Island have fallen significantly since then, but compared with 1980 they’re still much higher than prices nationwide:

A different comparison makes housing prices look somewhat more reasonable – this chart is Rhode Island home prices (blue) and per-capita income (green), again indexed to show the growth since 1980:

Update: The Rhode Island Progressive Democrats’ Sam Bell passed along this graph to quibble with my suggestion above that the stable housing prices of the 1990s were linked to the banking crisis, showing it was a regional phenomenon:

The local housing market is still struggling.

Rhode Island home prices declined 3.5% in September from a year earlier, the largest drop in any state, according to real-estate data firm CoreLogic Inc. Prices rose 5% nationally, with 43 of the 50 states reporting increases, including a 2.5% uptick in Massachusetts.

Housing prices doubled in Rhode Island between the summer of 2000 and the winter of 2006, according to the Federal Housing Finance Agency index. Prices have dropped 35% over the last six years and are now back to about the same level where they were in the summer of 2003.

A total of 11,832 homes were sold in Rhode Island during the 12 months through September, an increase of 10% from the previous year, according to CoreLogic. One in four of those were short sales, and there was a 9.9-month supply of distressed homes in the state.

Rhode Island continues to have more homeowners in trouble than most other states. CoreLogic said 7.5% of all mortgages in Rhode Island were at least 90 days delinquent in September, tied with Connecticut and topped only by Florida, Nevada, New Jersey, Illinois, Maryland, and New York.

Corelogic said 22.7% of Rhode Island homeowners had negative equity in September, meaning they owned more on their mortgage than their property was worth.

• Related: Watch Executive Suite with Gorbea, Marcantonio on RI housing (Oct. 29)

What’s wrong with Rhode Island’s housing market?

A new chart making the rounds this week in the economics blogosphere raises the question. Amir Sufi, a finance professor at the University of Chicago, compared each state’s house price crash from 2006 to 2011 with its house price recovery over the last two years.

Basically a state is worse off the closer it gets to the bottom-left of the graph, which arguably gives Rhode Island the weakest housing market of all – the seventh-worst housing crash in the nation from 2006 to 2011, followed by the weakest recovery (in fact, a further decline) into this year:

(h/t: Wonkblog)

Patrick Kennedy is sweetening the deal for would-be buyers of his home on Aquidneck Island.

Kennedy has cut the asking price for his three-acre waterfront property on Farmlands Drive in Portsmouth to $1.395 million, a $200,000 reduction from the original asking price in January, according to its listing with Prudential Prime Properties.

The former congressman built the 10-room, three-story home overlooking the Sakonnet River in 2001. It’s described as the Kennedy Orchard House and features three bedrooms, three bathrooms, two fireplaces and 3,144 square feet of living space. The estimated annual tax bill for the property is $17,975.

Kennedy, who now spends most of his time in New Jersey with his wife and new baby, has said he plans to buy a home in Providence to maintain his ties with Rhode Island. He retired from Congress in 2010 but returned recently to campaign for his successor David Cicilline.

Kennedy wouldn’t be the first Rhode Island politician to be disappointed by the local property market in the wake of the housing bust. Gov. Lincoln Chafee was forced to cut the price of his Providence home repeatedly before it finally sold for $675,000 last September.

• Related: Patrick Kennedy inherits millions from his late father Ted (Aug. 25, 2010)

The housing crash is still being felt across Rhode Island.

More than one out of every three homeowners in Providence County – 37% of all borrowers – are still underwater, meaning they owe more on their mortgages than their properties are worth, according to first-quarter data compiled by Zillow. That puts it among the worst 20% of all U.S. counties.

The situation isn’t much better in Kent County, which includes Warwick, where 34% of homeowners are underwater. Negative equity is much less prevalent in the southern part of the state, with underwater rates of 17% in Newport and Washington counties and 15% in Bristol County.

Three-fourths of Rhode Island residents live in Providence and Kent counties, and they’re caught in a regional phenomenon; at least 30% of mortgages underwater across a broad swath of Central Massachusetts, Northeast Connecticut and the northern half of Rhode Island, according to Zillow.

Housing prices in Rhode Island dropped 24% between the second quarter of 2006 and the first quarter of this year after soaring 151% from 1997 to 2006, according to the Federal Housing Finance Agency’s index.

(map via Zillow)

It’s no secret Rhode Island was hit hard when the housing bubble burst. But six years later after prices peaked, the state is still among the worst affected in the nation.

Rhode Island ranks No. 7 on a new Housing Misery Index created by Trulia, a real-estate data website. The index adds two numbers together: the percentage change in home prices from the peak and the percentage of mortgages either severely delinquent or in foreclosure.

Rhode Island scored a 34 on the index, primarily due to a nearly 30% decline in home prices since 2006. The only more miserable states were Nevada (73), Florida (62), Arizona (55), California (54), Michigan (37) and Idaho (35), with Georgia tying Rhode Island for seventh place.

“Why these two indicators?” writes Jed Kolko, Trulia’s chief economist. “First, big price drops lead to more underwater borrowers and less household wealth, which hurt the housing market and hold back economic recovery. Second, defaults and foreclosures damage consumer confidence in the housing recovery, and foreclosures cause pain not only for people who lose their homes but also for their neighbors.”

Richard Florida at The Atlantic Cities took a closer look at the numbers:

Housing misery is directly linked to the economic crisis. There is a substantial correlation between Housing Misery and the unemployment rate (.61). Housing Misery is positively associated with the percentage of state residents who rate current economic conditions to be “bad” (.47) and negatively so with the percentage who rate them as “good” (.46). There is no correlation whatsoever between housing misery and state income levels or education levels. …

[S]tates with higher levels of housing misery tended to vote for Obama in 2008 (the correlation between the two being .32), while those with lower levels of housing misery were more likely to go for McCain (-.33).

Bill McBride of the must-read economics blog Calculated Risk posted two interesting charts last month about the mortgage delinquency crisis that I thought I’d share. They’re a reminder of just how much the housing crisis has affected Rhode Island.

This first one shows the delinquency rates in the 10 worst-hit states at three points over the last four years: around the start of the housing crisis (January-March 2007), a year ago (January-March 2010) and this past winter (January-March 2011).

The data comes from the Mortgage Bankers Association; Rhode Island is second from the right:

A couple things stand out to me in this one. Rhode Island’s rate of seriously delinquent mortgages is quite high – ninth-worst in the nation. The percentage of delinquent mortgages in Rhode Island nearly tripled, from 5.5% to 14%, between 2007 and 2010. And while the total delinquency rate fell by a bit more than a percentage point over the past year, the share actually in foreclosure continued to rise.

This second chart has the same information as the last column of the first one. It shows the delinquency rates for all 50 states, sorted by level of serious delinquency. Rhode Island is ninth-worst, so it’s near the left side:

As a side note, reading Calculated Risk is one of the ways I learned how valuable good charts can be when it comes to reporting about money. Bill’s are much nicer than mine, partly because he’s smarter than me and actually understands Excel!

(charts: Calculated Risk)

Chafee's house at 54 Barnes St.

Bill McBride, who writes the must-read economics blog Calculated Risk, has been keeping an eye on Governor Chafee’s (thus far unsuccessful) efforts to unload the Providence house he and has wife bought in 2006.

As I reported yesterday, the Chafees have reduced the price twice since putting the home on the market in mid-February – it’s now listed for $799,000. McBride, who knows the housing market better than just about anybody, thinks they’re getting closer to what the market will bear:

When this house was first listed, I argued we’d see a price reduction. Although Case-Shiller doesn’t track Providence, house prices have fallen about 15% in Boston and 23% in New York – and that would suggest a selling price in the $700s for the Chafees’ home. So many homeowners are unwilling to price their homes realistically – at least the Chafees have been willing to reduce the price.

One of McBride’s commenters noted that the house has an appraised value of $801,200, so the Chafees are only now asking for what the city says it’s worth. Meanwhile, another commenter questions whether the local property market should be compared with those in Boston and New York:

I don’t know much about Boston’s real estate market. But why would you compare the real estate markets in Providence and New York? The economic base, job scene, inventory, relocation market, etc. is totally different. Providence once was one of America’s great manufacturing towns. Now, all it has left is government and education.

Providence has more in common with Detroit or Cleveland.

Detroit?!

Chafee's house at 54 Barnes St.

Doesn’t anybody want to buy Lincoln Chafee’s house?

After two and a half months on the market, this week the governor and his wife reduced the asking price for their 3,900-square-foot home on Providence’s East Side by another $30,000.

The Chafees are now seeking $799,000 for the seven-bedroom, three-and-a-half-bathroom property at 54 Barnes St.

That’s down 10% from the initial listing price of $889,000 they sought in mid-February. The Chafees had already reduced the price to $829,000 last month.

The Chafees bought the house for $939,000 in 2006, so selling at the current price would mean a $140,000 loss for the wealthy couple (before closing costs). They already tried to get rid the property in 2009 but didn’t wind up selling.

Home prices in the Providence-New Bedford area dropped 33% from the peak of the housing bubble in June 2006 through last December, according to a home-price index maintained by FNC Inc., a mortgage-technology firm. Prices on the relatively desirable East Side likely haven’t fallen by that much, however.

(photo: Residential Properties)

Last week’s much-discussed OSPRI report, which attributed Rhode Island’s limited population growth to economic factors like the estate tax, has stirred lots of discussion about what’s keeping more people from moving here.

For another hypothesis, check out Harvard economist Edward Glaesar’s essay in Sunday’s Boston Globe Magazine:

To really understand the conundrum of a state like Massachusetts – with its high incomes and low population growth – we must factor in our lack of housing. An area’s growth is almost perfectly correlated with the increase in the number of homes. If you don’t build, you don’t grow, and our state just doesn’t build.

The issue isn’t lack of demand for new housing, but the vast number of local regulations that deter it. …

While our anti-change rules may keep our communities looking the way we like them, they also mean that we do a worse job of providing affordable housing than deep red states, such as Texas.

Although Glaesar is writing about Massachusetts, the issue he raises could also apply to Rhode Island.

The state added only 11,940 new housing units between July 2000 and July 2009, according to the Census Bureau, bringing the total number to 452,191 – a 2.7% increase over nine years. “Rhode Islanders face a widening gap between their income and their housing costs despite decreased home prices,” HousingWorksRI reported in its housing affordability study last September.

Edward Sullivan is chief economist at the Portland Cement Association. (No, I’ve never heard of it either.) At this week’s International Building Show in Orlando, Sullivan offered a forecast for how quickly the housing market will recover in all 50 states.

The good news is, the housing market is set to make a fairly quick recovery – if you’re in North Dakota, South Dakota, Iowa, Nebraska and Oklahoma.

The bad news is, as a Nesi’s Notes reader you probably live in Rhode Island – where Sullivan says the housing market will make the fifth-slowest recovery in the whole United States, according to a MarketWatch article. Only Nevada, Michigan, California and Florida will take longer.

That list of states pretty much mirrors the monthly rankings of unemployment rates, which was one of the factors Sullivan used in his analysis. He also looked at mortgage delinquencies – nearly 5% of mortgages are delinquent in Rhode Island – and the decline in home prices, which have fallen 25.6% here from the peak.

Usually this is where I put in an “on the plus side” paragraph, but I’ve got nothin’. That stinks. Still, it won’t be a huge surprise to regular readers here; “RI housing market set for double-dip” was one of my first WPRI.com stories last July.

Another month, another set of grim sales figures from the Rhode Island Association of Realtors.

There were 548 single-family homes sold in Rhode Island last month, the Realtors reported this morning. That’s a drop of 29% from last August, when 768 homes were sold shortly before the original Sept. 30 expiration date of the federal homebuyer tax credit. It follows the record 34% plunge in sales we saw in July.

If you’ve been reading Nesi’s Notes, you won’t be surprised by today’s numbers, dismal as they are. Pending sales – an indicator of how many transactions are in the pipeline – have been falling since March.

The state of the housing market is vital to the broader health of Rhode Island’s economy, and with unemployment still in double-digits, this isn’t a good sign. Vince Valvo, group publisher at The Warren Group, told me in an e-mail that he expects this trend to continue through the first half of 2011:

We’re going to see big drops in sales numbers probably every month through next June. That’s right – for almost another year.

Pending home sales have been down every month since the tax credit expired. That means that the number of homes that close a couple of months later can’t be anything but down, too. So right now, the math doesn’t support any scenario where home sales at least through December can be up from last year. You can’t sell more houses than you’ve got contracts for.

Once we get into next year, we’re going to be comparing sales against the artificially-inflated numbers that we got because of the tax credit. Remember those big gains that got reported right through June of this year? Well, there’s no way next year’s first half is going to be that robust. So every report at least through June of 2011 is going to show housing sales dropping.

This isn’t a question of hope, or wishful thinking, or doomsaying. It’s math, pure and simple.

Markets were shaken and many economists were shocked by yesterday’s awful report on existing home sales in July, which nationwide dropped a record 26% from a year earlier thanks to the still weak economy and the expiration of the homebuyer tax credit.

The Rhode Island Association of Realtors won’t report what happened locally until Monday, but the Projo took a crack at figuring out what we’re going to hear:

Although RIAR spokesman Kerry Park said July sales in the state were down, it is unclear whether Rhode Island’s July decline will match the national statistics. …

“The flurry of activity ended on April 30; there is no question about that,” said Sally Lapides, CEO of Residential Properties Ltd. April 30 was the deadline for signing purchase-and-sales agreements for the tax credit; sales then had to close by June 30.

A 15% drop in July home sales, compared with July 2009, was seen in the eight Rhode Island offices operated by Coldwell Banker Residential Brokerage, according to Mary Leahey, regional vice president.

If anything, I’d expect homes sale dropped even more in Rhode Island than they did nationally and in Massachusetts (where sales fell 28% last month).

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