Where U.S. homes are most overpriced (© Forbes)Click to enlarge picture

Orlando, Fla., ranks No. 1 on Forbes.com's list of cities with the most overpriced homes. // Image courtesy of Forbes

Prospective buyers eyeing real-estate deals in foreclosure-ridden Florida, where home prices have plummeted and unsold properties clog the market, might find fewer bargains than they'd expected. That's because sellers in Orlando, Miami, Jacksonville and Tampa are likely to put their properties on the market for more than what they're worth.

They're not alone. In these markets and elsewhere across the country, homeowners still have an inflated sense of what their properties will fetch. Only 49% of U.S. homeowners believe their home's value has decreased in the past year, whereas prices have plunged for 72% of homes, according to a survey released last month by Zillow.com.

"Sellers are notoriously slow to adapt to declining market conditions," says Jonathan Miller, president and CEO of Miller Samuel Real Estate Appraisers. "Another way to look at it is that they're chasing the market down."

Behind the numbers
To find the cities with the most overpriced homes, we ranked the 40 largest Metropolitan Statistical Areas — geographic entities defined by the U.S. Office of Management and Budget, for use in collecting statistics — in four measures. Using data provided to Forbes by Altos Research, a Mountain View, Calif.-based real-estate research firm, we ranked each metro on the percentage of homes that had seen price reductions, an indicator of inflated pricing; the median number of days spent on the market (the longer homes stay on the market, the more likely they are to be overvalued); and the ratio of median list price (or asking price) to median absorbed price.

What's your home worth?

The absorbed price of a home is what it was priced at when it went off the market. It differs slightly from sale price, as not all sales in this category may have closed. But data on absorbed homes are more current, because home sales can take months to close after the price is set. The data from Altos Research are based on a 90-day rolling average as of the last week in November.

We also included the five-year forecast for the percentage change in the S&P/Case-Shiller Home Price Index, from Moody's Economy.com. In markets where home prices are expected to rise precipitously, a home priced above the average sale price may earn its investment. Thus, we ranked homes with a positive housing outlook as less overpriced. We averaged the scores for these four measures to arrive at a final ranking.

Trouble moving pricier homes
In some markets, a glut of unsold high-end homes causes a discrepancy between a metro's median asking price and the median price at which homes exit the market. Miami, the second-most-overpriced city, illustrates this trend. The median asking price here is high, at $490,197 (by comparison, the median asking price for the Altos 20-city composite, a measure used by the firm to approximate national prices, is $390,939). The homes going off the market sell for 19% below asking price.

See video related to: f3435cd8-2fd6-4aa8-9808-a5bc80d11f4d
This video requires the Adobe® Flash® Player. Download a free version of the player.

The problem is financing. Although government stimulus programs have spurred some homebuying activity in the lower-priced market, would-be buyers of more expensive homes are strapped for credit. In most markets, including Miami, Fannie Mae considers loans for homes above $420,000 or so to be "jumbo loans" that typically have higher interest rates. As sales of these homes are tight, home prices are hit — but prices are slower to budge.

"The high-end market is going down more than the overall market, but sellers in that market don't necessarily see themselves as being different from other sellers," says Miller. "So it's causing the spread between the ask price and contract price to widen."

In Orlando, the most overpriced large metro by our measures, homes are listed at 43% higher than what they sell for — a median $202,381.

Boston © PPSOP/Corbis

Bing & decide

"The demand in Orlando is really only for the least expensive properties," says Mike Simonsen, CEO of Altos Research. "The market as a whole is overpriced, in that people are not buying on the high end, they're buying on the entry level."

Underwater can become overpriced
But that doesn't mean that cheaper homes are moving faster in all markets. The 23% of American homeowners who owe more on their homes than what they are worth would be unable to pay back their loans if they budged on their asking price. Most have no choice but to wait out the market, even though values continue to drop.

"The people selling now are the people that have to sell," says Miller. "Some sellers simply can't adapt to the market. Maybe they bought a year ago and now they're underwater. They will wait."

Take Phoenix, the No. 12 most overpriced city, where 64% of homeowners are underwater, according to Zillow.com's most recent Negative Equity Report. In that metro, homes are listed for 22% more than when they are sold for, among the highest spread of all the cities we surveyed. Homeowners there simply can't afford to drop their prices.

Some of the cities that were ranked most overpriced, like Chicago and San Antonio, had about average discrepancies between asking price and sale price. By the strictest definition, they aren't tremendously overpriced. But red flags fly for other, more subtle signs that their list prices may be out of whack.

In the largely healthy Chicago metro, rampant overbuilding in suburbs like Naperville has kept homes on the market for an average of six months — sellers aren't pricing them to move fast. In San Antonio, 42% of homes have knocked asking prices down, a sign that the market disagrees with sellers on their initial price.

"There's the straight list-to-absorbed price ratio, but a lot of metros are in this common range of about 115%," says Simonsen. "So then you have to look at other factors, like how many homes have price reductions."

Las Vegas, a market that has yet to emerge from the wreckage of the foreclosure crisis — one in every 68 homes was in foreclosure in October, according to RealtyTrac — is among the least overpriced large metros, a fact that may seem surprising. But although its housing market may take a long time to recover, homes are listed at a median $168,161, far lower than most large metros, suggesting that sellers have gotten pragmatic about pricing. And government initiatives like the first-time homebuyer tax credit have spurred demand among budget buyers.

"In Las Vegas, it looks like homeowners are pricing homes to clear the market," says Delores Conway, a visiting real-estate economist at the Simon School at the University of Rochester. "And it's because there's financing available at the low end."

Sellers don't necessarily cling to optimistic asking prices out of stubbornness or cluelessness. Many can't change their price — either because they're trapped in a slow-moving high-end market, or because their homes are underwater, and selling at a loss isn't an option.

"People don't have negotiating power," says Miller. "They're not being greedy, but they just can't be as flexible as the market demands."

The 10 most overpriced metro areas

1. Orlando-Kissimmee, Fla.
2. Miami-Fort Lauderdale-Pompano Beach, Fla.
3. Jacksonville, Fla.
4. Baltimore-Towson, Md.
5. Chicago-Naperville-Joliet, Ill.-Ind.-Wis.
6. San Antonio
7. Denver-Aurora, Colo. (tie)
7. Tampa-St. Petersburg-Clearwater, Fla. (tie)
9. Indianapolis-Carmel, Ind.
10. Austin-Round Rock, Texas (tie)
10. Nashville-Davidson-Murfreesboro-Franklin, Tenn. (tie)

View the full list of the most overpriced homes in the U.S. on Forbes.com.