Housing has lawful and acceptable values in the real estate market. But these days, it usually goes overvalued rather than undervalued. It is very common today that people are being priced out. Even the median-priced home is no longer affordable to a median-income household.
So, how do you spot an overpriced or underpriced housing?
First method is from the John Burns Real Estate Consulting. An article has been published in its website "a map of our over/underpriced conclusions." In the article, it has also explained its methodology in arriving at the final results.
So here is how it's done. The company has studied "the ratio of housing costs / income over time in every major market in the country, considering everything they know about each market to determine what the long-term ratio of housing costs / income should be." This is now called the Intrinsic ratio, its term is coined from the "investment concept of intrinsic value that has long been trumpeted by Warren Buffett and many other long-term investors." This intrinsic ratio enables the researchers identify the yellow flag in early 2000, and the green flag in 2011.
Now here's the assumption of the said study, the intrinsic values though requires a long term view help arrived the estimate of the long-term mortgage rate. In the study, the researchers arrived at the rate of 6.0%. It also noted that the goal of this study "is not to help consumers with the buy decision, nor to help short-term investors. Intrinsic value analysis is designed to help long-term investors, such as those buying land to build a new home community or those investing in building products companies." In addition, the study says that even if the result of the housing rates are overpriced using the assumed mortgage rate of 6.0%, the interest rate savings could be beneficial for the buyers as an investment.
The conclusions of the intrinsic ratio based on the study is reflected in the picture below:
Another article has a very different way of identifying an overpriced or underpriced housing. Early To Rise says that there are indicators on how to spot an overvalued or undervalued property. One has to look for the value criteria. One value considered is "how the typical house is priced relative to rents and relative to household income."
An example has been set to give a clearer idea of what is meant by the author. "In the U.S. right now, the typical house trades for about 21 times annual rents. That means if a house would rent out for $12,000 a year (or $1,000 a month), it's selling for about 21 times that amount - or about $252,000. At these ratios, the rents won't come close to covering your typical mortgage and expenses. In bubble markets, it's even worse."
Another key value criterion that one needs to consider "is the price of the typical house compared to the typical household income. Nationally, the median-priced home tends to sell for just over four times the median household income in the area. Historically, this is a little high, but still affordable. But not in the bubble markets."
For Example, in L.A. California, the median household income is just about $56,200 but the median-priced home is $586,500. This simply mean that a regular income buyer could not afford a median-priced homes in LA.
But in Houston, Texas, the scenario is quite the opposite in LA. The housing price is affordable because the median-priced home is just $148,600 and the median household income at $60,900.
By learning the median-priced home and median-household income, one could say if the housing market in his or her area is overvalued or undervalued.
