How much is a house worth? Of course prices fluctuate, but somehow there should be a standard way to determine the real value of a house. Like anything else, it’s determined by the benefits its owner receives. It’s not just about the house itself, or homes in New York wouldn’t be worth so much more than homes in Idaho. To a large degree, it’s related to availability of jobs. People will move to where there are good paying jobs. Their income determines what payments they can qualify for. Even in a metropolitan area, more centrally located homes command higher prices. Logically, there should be a way to calculate a home’s value based on its location. Economists have developed such a formula, and determined that prices do tend to move in the direction of the realistic value over time.
If this is true, we should be able to do the math and go out and buy a home for its actual value? Right? Not exactly. In the near term prices fluctuate with other factors, like availability of funds and buyer and seller expectations.A few years back, lenders were making stated income loans left and right. If you could afford the teaser rate, you could buy a house. The increase in demand drove prices up above the realistic values. No one worried about what would happen when the rate increased. They assumed that prices would continue to rise and mortgage financing would be available. But as everyone knows, artificially inflated prices can’t continue indefinitely. When mortgage payments on those subprime loans increased, it all started crashing down.
A market correction was definitely in order, but as we often see, it went too far. Lenders didn’t just stop lending to buyers who can’t afford the payments. They made the requirements so stringent that even buyers who could qualify during ‘normal’ times couldn’t get a loan.And a flood of distressed properties and forclosures drove prices well below their values.Now potential buyers want to wait until prices have bottomed out. But when will that be?
Time and time again, history shows us that the market will overcorrect. Just as optimism and easy lending drove prices too high, fear will drive prices too low. When will the decline stop? A few savvy buyers will realize that the prices can’t go much lower, and they won’t be able to resist the bargains any longer. If you can buy something for less than it’s worth, you come out ahead – even if someone else gets the same thing for a dollar less the next day. As soon as it starts, many home buyers will jump on the bandwagon and prices will increase. Most of us won’t know that has happened until months after the fact.
Economists are starting to tell us that residential real estate is undervalued in many, but not all, cities. Which areas are those? The areas that saw unrealistically huge price increases are now suffering the largest declines. In a review of Southern California real estate prices, Global Insight said that real estate in Los Angeles is 6.4% undervalued, Orange County real estate is 10.9% undervalued, homes in Riverside-San Bernardino are 15.7% undervalued, and San Diego homes are 21.2% undervalued.
Does that mean you should rush out and buy a home in San Diego or Riverside? It depends.Even within an area, the market is different depending on the segment. There are still a lot of distressed properties and foreclosures on the market, mostly starter homes. At the same time, higher end homes are relatively scarce. If you’re in the market for a starter home, you might want to wait a bit. If you’re looking for a move up home, there are some great bargains. And right now interest rates are at historic lows and the government is offering tax incentives to home buyers in an effort to get the real estate market moving again.
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