Are Home Prices Still Undervalued?
For the past two years national home prices have risen sharply, which might lead to the conclusion that they are overpriced. In fact, if we’re to believe the most recent report by real estate website Trulia, they are still 5% undervalued when measured against long-term fundamentals. So will this summer’s home prices be broaching unsustainable levels—or will they be reasonable?
The Problem of Measuring Only Home Price Increases
Real estate price increases by themselves are poor indicators of over- or undervalued real estate. Because of the headlong drop in real estate prices in 2007, throughout most of the country, prices have increased significantly without approaching the previous highs. A well-publicized example is in Las Vegas, where prices have increased by almost 60% over the last couple of years, yet by many yardsticks remain affordable.
How Home Affordability Is Measured
There are a number of different ways of measuring whether home prices could be considered to be over- or undervalued. They include looking at how current prices compare with long-term trends; how prices measure up against average incomes; the comparable cost of renting, etc. The Trulia report used a wide range of these indicators to emerge with a complete picture of the affordability of real estate across the country. Not all research confirms Trulia’s assertion. According to the Fitch Sustainable Home Price Model, national prices are overvalued by something like 15%. Critics note, however, that the Fitch model is distorted by prices in some of the markets selected – particularly California.
Why 2014 Isn’t 2006
I find Trulia’s track record impressive. In the first quarter of 2006, they reported that home prices were 39% overvalued…and by 2011, that number had fallen to 15% undervalued. Its latest finding that current national prices are still 5% undervalued gives weight to those who believe we are far from entering “bubble” territory—at least for the time being. Some contributory factors could explain why. Inventory has been constrained for a number of years, fallout from the weakness of building activity following 2007. Mortgage rate increases have slowed, but since they are still slightly higher than before, they have provided a dampening effect. Also relevant: some of the new lending regulations make it less likely that we will see a repeat of the rampant sub prime lending that triggered collapse in 2007.
All of which makes a fairly convincing case for homeowners to be reasonably confident that the price gains made over the past couple of years won’t soon disappear. Of course, individual home prices vary from neighborhood to neighborhood, just as they do from house to house. If you’re interested in an accurate home price analysis of your own property, I hope you’ll call me today—I am always happy to schedule a free and confidential evaluation.