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Are Homes Actually UNDERVALUED?

We have been barraged with headlines and news stories telling us that home values will continue to soften for the next several quarters. Some experts are predicting that today’s values will drop and not be seen again until the middle of 2012 at the earliest. We concur with these estimates based on the current demand for housing in relationship to current supply of both the visible and the shadow inventory of houses. Here we are discussing ‘market value’.

However, there is another way to value residential real estate. Housing analysts look at the ratio between current wages and sales prices. They use a multiplier to determine how much home the average buyer can afford and compare that to the average price at which a home sells. DSNews just ran an article on this subject. They stated:

The sharp fall in residential property prices in the third quarter means that housing in the United States has become even more undervalued, according to the analysts at Capital Economics.

Based on the latest S&P Case-Shiller index, Capital Economics has concluded that house prices are now 17 percent undervalued relative to disposable income per capita. Housing has never before looked as undervalued, the firm pointed out in a research note released to DSNews.

Looking at the data included in the index compiled by the Federal Housing Finance Agency (FHFA), residential home prices are 14 percent undervalued, which is also a record, according to Capital Economics.

The National Association of Realtors (NAR) has their own Housing Affordability Index. According to NAR:

The affordability index measures whether or not a typical family could qualify for a mortgage loan on a typical home. A typical home is defined as the national median-priced, existing single-family home as calculated by NAR. The typical family is defined as one earning the median family income as reported by the U.S. Bureau of the Census. The prevailing mortgage interest rate is the effective rate on loans closed on existing homes from the Federal Housing Finance Board and HSH Associates, Butler, N.J. These components are used to determine if the median income family can qualify for a mortgage on a typical home.

 In their article, DSNews also addresses the NAR index:

The housing affordability index from the National Association of Realtors (NAR) remains close to its record high. Capital Economics explained that NAR’s affordability assessment indicates that a median income household with a 20 percent down payment can now more easily afford the monthly mortgage payments on a median-priced home than at any time in the last 30 years.

By each of these historic measurements, homes are at all time values!!

Bottom Line

Lack of consumer confidence has caused many buyers to refrain from taking advantage of the golden opportunities that exist in housing today. However, buyers should look at COST (price and interest rate) not just price. People who purchase today will reap the reward of buying an undervalued asset and should enjoy excellent appreciation when inventory levels return to normal levels.

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5 replies
  1. JOEinDenver
    JOEinDenver says:

    The problem with that thought, is the larger unemployment number. As well as the young workforce, who will not find it easy to find a job, and will not find the same wage they received during the the the boom from 1994 to 2006. Deflation is a real threat to dropping wages even lower. The spoiled child of the 90’s will find reality much more difficult then imagined. A 20-30% drop in real estate prices is a real possibility, without a recovery in sight before the middle of 2013, if even then.

  2. Jesse in Atlanta
    Jesse in Atlanta says:

    Who’s to say how much someone qualifies for? The market is full of foreclosures that someone once qualified for. Fannie Mae and Freddie Mac say that we can qualify for a conventional loan with a 45% debt ratio. That’s 45% of the gross wage. Most borrowers max out their home purchase and end up with very little after tax dollars to spend or hopefully save. Whatever happened to the 28% front and 36% back ratio? We need to realize ratios have been allowed to go up over the years to help fill the demand for a once robust mortgage industry that is no more. To create stability in this country we need to create stability within our citizens. We will never do so by allowing them a mortgage payment that is too much for their budget.

  3. Steve
    Steve says:

    Indexes are irrelevant to people who are looking to purchase or sell a home. And to preach the golden opportunities that exist is painting a misleading picture on a very wide canvas.

    Thank goodness consumers are finally thinking to themselves and not to those who are preaching their own agenda.


Trackbacks & Pingbacks

  1. […] week, we did a blog post on house prices as compared to income levels. We showed that, using historic ratios, house values were lower than previous norms. […]

  2. […] week, we did a blog post on house prices as compared to income levels. We showed that, using historic ratios, house values were lower than previous norms. […]

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