Homes in San Diego Selling Below Value

How much is a home 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 the house that sets the price, or homes in Virginia wouldn’t command a higher price than homes in Wisconsin. 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. 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? Well, no. In the near term prices fluctuate with other factors, like availability of funds and buyer and seller expectations.A few years back, lenders were making stated income loans left and right. If you could afford the teaser rate, you could buy a house. The increased demand drove prices up to unrealistic levels. 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 as we all know, artificially inflated prices can’t increase indefinitely. When the interest rates on those subprime mortgages went up and people couldn’t afford their mortgage payments, the crash began.

The market correction was necessary, but as often happens, 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. And a flood of foreclosures and distressed properties drove prices below their correct values. Now no one wants to buy until they know that prices have bottomed out. But when will that be?

Historically, we know that the market will overcorrect. The same way that excessive optimism pushed prices too high, fear will push them too far down. When will it stop? A few smart buyers won’t be able to resist the bargains any longer.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. As soon as it starts, many home buyers will jump on the bandwagon and prices will increase. Most would-be buyers won’t know that’s happened until months later.

Economists are saying that homes are undervalued in many markets. Which markets, you ask? The markets that grew far above their correct values are now suffering the greatest decreases. In a review of Southern California real estate prices, Global Insight said that real estate in Los Angeles is 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 area, conditions differ in various price ranges. There are still a lot of distressed properties and foreclosures on the market, mostly starter homes. At the same time, move-up 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 the government is offering tax incentives to home buyers in an effort to get the real estate market moving again and interest rates are at historic lows.

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