Are Home Prices At Fair Value Now?

This week’s Economist has an article discussing signs of US economic life, and most noteworthy is the following excerpt on housing. Buyers do indeed emerge when prices reach fair value, and this rule transcends all press hysteria. The question is whether consumers are getting a good deal or prices have further to fall. The answer is, of course, dependent on conditions in each local area so consumers need to work with a professional and/or do their own neighborhood-level valuations before making and long-term decisions.

THE current recession has broken many of the rules of business cycles, but not this one: when something gets cheap enough, buyers emerge.

America’s housing bubble seems mostly deflated. According to the S&P/Case-Shiller 20-city index, house prices through January were down 29% from their all-time peak. Relative to incomes, houses are now 10% undervalued, and relative to rents they are fairly valued, thinks Paul Dales of Capital Economics, a consultancy.

This is luring buyers back. House sales rose unexpectedly in February. The National Association of Realtors estimates that up to 45% of existing homes sold were “distressed” properties—those in, or close to, foreclosure. In Nevada, which with California, Florida and Arizona was the epicentre of the boom and bust, fourth-quarter sales were more than double their level a year earlier. Keith Kelley, a Las Vegas estate agent, has an investor interested in offering about $80,000 for a foreclosed, four-unit apartment building which, fully let, could bring in over $25,000 a year in gross rent. He has two buyers interested in paying $220,000 for a five-bedroom house that sold in 2004 for more than triple that. Their monthly mortgage payment would be about half the rent on a similar property. Even so, he says, “I still talk to buyers waiting to see when we get to the bottom.” Indeed, homes may be fairly valued now but could get dirt cheap if, as commonly happens, prices overshoot.