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. The house itself is not the largest factor, or even the most important factor in price. 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 a metropolitan area, homes with shorter commutes to employment centers command higher prices. Logically, there should be a way to calculate a home’s value based on its location. Economists have developed such a formula, and determined that prices do tend to move in the direction of the realistic 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? Um, no. In the short term prices fluctuate according to other factors, such as lending practices and consumer optimism.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. Nobody gave much thought to what they would do when the rate went up. They assumed that prices would continue to rise and they could get a new mortgage loan then. But as we all know, artificially inflated prices can’t increase indefinitely. 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.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 happen?

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 it stop? A few smart buyers will realize that the prices can’t fall much more.  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. Once it starts, then more buyers will join in and the prices will start increasing. Most home buyers won’t know this has taken place until months after the fact.

Economists are saying that homes are undervalued in many markets. Which areas are those? 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?Well, 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, higher end homes are relatively scarce. If you’re looking for a condo, you might want to wait a little longer.  If you’re looking for a move up home, there are some great bargains.  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.

Tags: new homes in san diego, real estate, employment centers

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