Are U.S. homes undervalued?


Are U.S. homes undervalued? A new survey suggests they are, but don't confuse that fact with 'a good time to buy a home.'

U.S. home prices fell at a 6.9% annual pace in Q3, and are down 6.5% from their 2007 peak, with prices falling in 241 of 330 metropolitan markets, a survey by IHS Global Insight shows, marketwatch.com reported. Further, compared to their long-term fundamental values, U.S. homes are now 3.8% undervalued.

Undervalued homes? Yes, but...

Undervalued, yes. But does undervalued mean U.S. home prices are not likely to fall further? BloggingStocks asked economist Peter Dawson for an assessment.

"Home prices most certainly can fall further, and will continue to do so in most markets over the next year," Dawson said. "Potential home buyers have to keep in mind that just because a home in, say, Miami was $725,000 last year and is priced at $600,000 this year, and is 'undervalued,' that doesn't mean it can't fall to $500,000 or less by next year. And the price trend in most markets remains down. Home buyers need to keep sight of that."


The key factor in detecting home price trends, in Dawson's view? Home inventories. At the end of October, the supply of unsold, existing homes totaled a 10-month supply, at the current sales pace, according to National Association of Realtors data. The normal existing home supply is 3-5 months in a healthy market. Dawson said.

The NAR also said the national, median existing-home price for a single family home was $181,800 in October, down 11.2% from a year ago.

"There is a huge inventory of unsold, existing homes," Dawson said. "This unsold inventory will continue to drive prices lower in most markets, so don't look for prices to flatten and begin to rise until inventories get down to a 5-6 months supply. We're a long way from that."

Dawson's rules of thumb for potential home buyers: Unless you find your dream house "that you must have," or otherwise must buy, don't buy now. You'll most likely pay less for a house in a year, in most markets, if you wait. Also, if possible, consider renting/leasing for a year if you must move to a new city/area: that will give you more time to evaluate market conditions, among other advantages.

Housing Sector / Economic Analysis: It remains a decidedly buyers' market in housing in most U.S. metro areas. Therefore, take your time, if you have the time to research and explore home alternatives. Don't make the mistake one friend-of-a-friend made: they bought a house in Southern California about six months ago for $575,000. Comparable homes are now selling for $520,000.

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Last updated: February 12, 2012: 04:00 PM

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