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San Diego Homes at Bargain Prices

Sunday, January 31st, 2010 | Real Estate | No Comments

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.

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