How much is a house worth? Of course prices change over time, but there should be a standard formula for determining the value of a home. It turns out that like anything else, it’s related to the benefits that come with it. The house itself is not the largest factor, or even the most important factor in price. To a large degree, it’s related to availability of jobs. People will buy homes near good paying jobs. Their salary determines how much home they can afford. Even within commuting distance of employment centers, more centrally located homes command higher prices. So there should be a formula of what homes are worth in a given area. There are such models, and they tell us that prices tend to move in the direction of this value over time.
So we should be able to figure out the actual value and buy a home for that price? Right? Um, no. In the near term prices fluctuate with other factors, like availability of funds and buyer and seller expectations. A few years ago banks were making subprime loans left and right. If you could sign documents saying that you had the income to afford the teaser rate, you could buy a home. The increased demand drove prices up to unrealistic levels. Nobody gave much thought to what they would do when the rate went up. They assumed that prices would continue to rise and mortgage financing would be available. But of course artificially inflated prices can’t last forever. When the interest rates on those subprime mortgages went up and people couldn’t afford their mortgage payments, the crash began.
A market correction was definitely in order, but as we often see, it went too far. The mortgage lenders didn’t just revert to more traditional requirements. 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 no one wants to buy until they know that prices have bottomed out. But when will that be?
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 it 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 are able to buy something for less than it’s worth, you come out ahead – even if someone else gets the same thing for a little less the next day. Once it starts, an avalanche of buyers will join in and prices will rise. 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 areas, you ask? The areas that soared far above their real values are now reduced to bargain prices. 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? It depends. Even within a geographic market, the situation is different in various market segments. Currently there are still a lot of distressed properties on the market, mostly starter homes. At the same time, move-up homes are in short supply. If you’re looking for a starter home, now might not be the right time.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.
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