US housing market sees rise in “false equity”

Prices in several cities climbing at a faster rate than rental incomes, cost of building new homes

In 14 major housing markets across the country, home prices are climbing at a faster rate than both rental incomes and the cost of building new houses, according to a new study by Florida-based real estate valuation firm Smithfield & Wainwright.

The heightened disparity between sales prices and expenses such as rents and “replacement costs” is known as “false equity.” Smithfield & Wainwright found that recent sales prices of single-family homes in a total of 13 states and the District of Columbia are, on average, 10 percent above the value of homes based on two other appraisal methods, the Wall Street Journal reported.

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Average home prices rose by 36 percent from late 2000 to late 2006 after adjusting for inflation. Rent grew by 5 percent, while reconstruction costs were up by 16 percent, the study showed.

The 13 most overheated states include New Jersey, District of Columbia and Massachusetts. New York did not make the cut, according to the newspaper. [WSJ]Mark Maurer