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. It turns out that like anything else, it’s related to the benefits that come with it. It's not just the house that sets the price, or homes in Virginia wouldn't command a higher price than homes in Wisconsin. 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 within commuting distance of employment centers, more centrally located homes command higher prices. With this information, we should be able to figure out what a house in a particular area is worth. Economists have developed such a formula, and determined that prices do tend to move in the direction of the realistic value over time.
So we should be able to figure out the actual value and buy a home for that price? Right? Well, no. In the short term prices fluctuate according to other factors, such as lending practices and consumer optimism. A few years ago banks were making subprime loans left and right. Anyone who could qualify at the teaser rate based on stated income could buy a house. The increase in demand drove prices up above the realistic values. Nobody gave much thought to what they would do when the rate went up. They assumed that prices would continue to rise and they could get a new mortgage loan then. But of course artificially inflated prices can’t last forever. When the teaser rates expired and mortgage payments went up, the crash began.
The market correction was necessary, but as often happens, it went too far. The banks didn’t just stop lending to buyers who can’t afford the loans and go back to more traditional lending models. They made the requirements so stringent that even buyers who could qualify during ‘normal’ times couldn’t get a loan.On top of that, forclosures flooded the market, driving prices below their values. Now no one wants to buy until they know that prices have bottomed out. But when will that happen?
As before, market prices will overcorrect. The same way that excessive optimism pushed prices too high, fear will push them too far down. When will the decline stop? A few smart buyers will realize that the prices can’t fall much more. 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. Once it starts, then more buyers will join in and the prices will start increasing. Most home buyers won't know this has taken place until months after the fact.
Economists are saying that homes are undervalued in many markets. Which markets, you ask? The areas that saw unrealistically huge price increases are now suffering the largest declines. Global Insight reviewed Southern California real estate prices and determined that homes in LA are 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.
So, should you go buy a house in San Diego?Well, it depends.Even within a geographic area, conditions differ in various price ranges. 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 larger home, there are some deals available.And right now the government is offering tax incentives to home buyers in an effort to get the real estate market moving again and interest rates are at historic lows.
