San Diego Homes at Bargain Prices
Sunday, January 31st, 2010 | Real Estate
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. 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 move to where there are good paying jobs. Their income determines how much house they can afford. Even within commuting distance of employment centers, more centrally located homes command higher prices. Logically, there should be a way to calculate a home’s value based on its location. 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? Well, 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 afford the teaser rate, you could buy a house. The increase in demand drove prices up above the realistic values. No one worried about what would happen when the rate increased. 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.And a flood of distressed properties and forclosures drove prices well below their values.Now potential buyers want to wait until prices have bottomed out. But when will that be?
Historically, we know that the market will overcorrect. Just as optimism and easy lending drove prices too high, fear will drive prices too low. When will prices stop falling? 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 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. As soon as it starts, many home buyers will jump on the bandwagon and prices will increase. 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 areas, you ask? The areas that saw unrealistically huge price increases are now suffering the largest declines. 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.
Does that mean you should rush out and buy a home in San Diego or Riverside?Well, it depends. Even within a geographic market, the situation is different in various market segments. Currently there are still a lot of foreclosure properties on the market, mostly starter homes. At the same time, higher end homes are relatively scarce. 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 interest rates are at historic lows and the government is offering tax incentives to home buyers in an effort to get the real estate market moving again.