Buy a Southern California Home Below Value
Posted by Knowledge Guy in Business and Commerce, tags: Banks, Buy A House, Buy Homes, Buy House, California Home, Direction, Distressed Properties, Employment Centers, Forclosures, Good Paying Jobs, Idaho, Math, Models, Mortgage Payments, new homes in san diego, Optimism, People, Realistic Values, riverside new homes, Southern California, Subprime Loans, Teaser RateWhat’s the value of a home? Of course prices fluctuate, but somehow there should be a standard way to determine the real value of a house. Like anything else, it’s determined by the benefits its owner receives. 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 buy homes near 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. So there should be a formula of what homes are worth in a given area. There are such models, and they tell us that prices tend to move in the direction of this value over time.
If this is true, we should be able to do the math and go out and buy a home for its actual value? Right? Not exactly. In the short term prices fluctuate according to other factors, such as lending practices and consumer optimism. A few years ago banks were making subprime loans left and right. Anyone who could qualify at the teaser rate based on stated income 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 mortgage payments on those subprime loans increased, it all started crashing down.
A market correction was definitely in order, but as we often see, it went too far. The banks didn’t just stop lending to buyers who can’t afford the loans and go back to more traditional lending models. They made the requirements so stringent that even buyers who could qualify during ‘normal’ times couldn’t get a loan.In addition to that, the many forclosures and distressed properties on the market drove prices down below their values. Now no one wants to buy until they know that prices have bottomed out. But when will that be?
Time and time again, history shows us 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 smart buyers will realize that the prices can’t fall much more.If you are able to buy something for less than it’s worth, you come out ahead – even if someone else gets the same thing for a little less the next day. Once it starts, an avalanche of buyers will join in and prices will rise. Most would-be buyers won’t know that’s happened until months later.
Economists are saying that homes are undervalued in many markets. Which areas are those? 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? It depends. Even within a geographic market, the situation is different in various market segments. Currently there are still a lot of distressed properties on the market, mostly starter homes. Meanwhile, move up and higher end homes are in short supply. If you’re looking for a condo, you might want to wait a little longer.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.
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