Homes in San Diego are Undervalued
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. 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 buy homes near good paying jobs. Their income determines how much house they can afford. Even within a metropolitan area, homes near employment centers are worth more than those in outlying areas. 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.
If this is true, we should be able to do the math and go out and buy a home for its actual value? Right? Well, no. In the short term prices fluctuate according to other factors, such as lending practices and consumer optimism.A few years back, lenders were making stated income loans left and right. Anyone who could qualify at the teaser rate based on stated income could buy a house. 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 teaser rates expired and mortgage payments went up, the crash began.
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.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 be?
History has shown that the market will overcorrect. The same way that excessive optimism pushed prices too high, fear will push them too far down. When will prices stop falling? A few smart buyers 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. 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 starting to tell us that residential real estate is undervalued in many, but not all, cities. Which markets, you ask? The markets that grew far above their correct values are now suffering the greatest decreases. 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 out and buy a home in Riverside or San Diego? It depends. Even within a geographic market, the situation is different in various market segments. There are still a lot of distressed properties and foreclosures on the market, mostly starter homes. Meanwhile, move up and higher end 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 move up home, there are some great bargains.And now interest rates are phenominally low and there are great tax incentives available to first time buyers and new home buyers.
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