Are Today’s Homes Undervalued?
An over-correction on prices will delay economic recovery.
After dropping for three years, home prices appear to be stabilizing. The median national home price today is about $169,000, down almost 14 percent from a year ago and an estimated 30 percent from its peak. It’s safe to say we’ve reached the point where prices are justified by the fundamentals of the economy and may even represent an undervaluation.
Foreclosures and short sales comprise about 50 percent of transactions today, creating market distortions in otherwise stable neighborhoods. In determining valuations, we’re capturing only transaction prices, and prices of those properties might be 20 percent below values of other homes.
For that reason, it’s possible that widely cited projections that a third or more of home owners are underwater might be off the mark. The consequences of these missed projections are significant. Lenders are shying away from refinancing mortgages of otherwise creditworthy households on the basis that their homes are underwater. By not making these loans, lenders are exacerbating the financial hardship faced by these households.
Yet there are encouraging signs on the horizon. The First-Time Home Buyer Tax Credit, which Congress improved two months ago by eliminating the repayment requirement and increasing the benefit to $8,000, is working. That credit, coupled with all-time-high housing affordability and continuing low interest rates, is leading to solid inventory improvements in most markets. Yet when we look only at homes in high-cost areas requiring jumbo loans, the months’ supply is in the stratosphere: almost 45.
What’s clear is that the challenge today is getting credit moving again for everyone. Until then, markets will continue to be distorted by the disproportionate number of short-sale and foreclosed homes for sale.
Lawrence Yun is chief economist of the NATIONAL ASSOCIATION OF REALTORS®.
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Homes May Be Undervalued Today
After dropping for two years, home prices appear to be bottoming out, and any further declines would be an overcorrection, NAR Chief Economist Lawrence Yun told thousands of practitioners at the REALTORS® Midyear Legislative Meetings in Washington, D.C., on Thursday.
The median national home price today is about $169,000, down almost 14 percent from a year ago and an estimated 30 percent from its peak. Today’s prices are justified by the fundamentals of the economy and may even represent an undervaluation, Yun said.
Lender Policies Hinder Recovery
Distressed sales, which today comprise about 50 percent of transactions nationwide, are creating market distortions in otherwise stable neighborhoods. “We’re only capturing transaction prices,” he said, and those prices might be 20 percent to 25 percent below actual values. For that reason, it’s possible that widely cited projections that a third or more of homeowners are underwater might be off the mark, he said.
The consequences of these missed projections could be huge. Lenders, shying away from refinancing mortgages of troubled owners, exacerbate the downward spiral of homeowners’ financial position and that, by extension, hurts the broader economy.
Contributing to the problem is the lack of reasonably priced financing for higher-cost homes at a time when declining prices, low rates, and the home buyer tax credit are helping the entry-level market.
Indeed, while housing overall is at a 9.5 month supply, down from double digits not that long ago, homes above $729,750—the threshold for jumbo loans—face a 40-month supply.
Key Test
By summer, all of the incentives that have been put into place by the government will have had several months to work, Yun said. If sales start picking up significantly, then prices should stabilize and trigger a broader economic recovery.
If sales don’t show a significant response, then the federal government might have to look at another big injection of funds into the economy, something no one has an appetite for.
Yun’s forecast reflects the brighter scenario: “My projection is home sales will be 10 to 20 percent higher the second half of this year than last year and we will come out of this recession in 2010,” he said.
—Robert Freedman, REALTOR® Magazine
Front Gate Properties, We’re selling the BEST Real Estate in Aiken, SC.