The proof is in the numbers people!

I found this article in yesterdays business section of the Union Tribune. I strongly encourage you to pass this on to your friends, family and colleagues and take this into consideration while making your upcoming real estate decisions.  

Housing called undervalued

Report says S.D. prices are 21% below norms

2:00 a.m. June 4, 2009



San Diego County used to be one of the nation's most overpriced real estate markets, as much as 40 percent above historic norms, according to the IHS Global Insight financial analysis company.

Yesterday, in a dramatic turnaround, Global Insight said housing prices in San Diego are 21.2 percent undervalued.

“It's definitely coming back from the boom,” said Global Insight economist Jeannine Cataldi.

The median price for a single-family home was $327,300 in the first quarter, the company said. Based on historic trends for household income, affordability and appreciation, the “normal” value should have been $415,300.

That contrasts with the peak of the boom market, in the third quarter of 2005, when Global Insight found the median price of $506,500 was above the norm by $144,100, or 40 percent.

From the peak, local housing prices have fallen 35.4 percent, back to a level last seen in the fourth quarter of 2002, the company said.

This was the fourth consecutive quarter that San Diego housing prices were below what the company considers to be the normal price. It was the biggest gap since the second quarter of 1999, when the median price of $190,400 was $53,400, or 21.9 percent, below the theoretical norm.

And as economists well know, San Diego wasn't alone as the housing bubble inflated and then deflated in many markets.

Global Insight said that while first-quarter prices fell in 199 of 330 metro areas from fourth-quarter levels, including San Diego (down 1.9 percent), the entire nation is slightly undervalued.

In the company's calculations, six areas are extremely undervalued, with Vero Beach, Fla.'s $125,400 median price 42.5 percent below the norm. San Diego ranked as the 61st most undervalued market.

Riverside-San Bernardino's first-quarter median of $183,400 was 15.7 percent below its norm; Orange County was 10.9 percent below its norm at $457,000; and Los Angeles was 6.4 percent below its norm at $357,100.

Meanwhile, only one area, Atlantic City, N.J., was considered extremely overvalued – defined as more than 35 percent – with its $243,600 median price 44.1 percent above the norm.

Redding was the highest-ranked California city, yet its median of $180,400 was still 6 percent below its norm.

“You can look at California, Las Vegas, Phoenix, all the areas where the boom really took hold,” Cataldi said. “Those markets definitely overinflated because of buying activity and are now being pulled down below the norm, because so many of them are being hit hard with foreclosures and short-sales which came out of the boom.”

But Cataldi said the level of undervaluation does not apply equally to all houses.

“It depends on the home itself,” she said. “And the home is worth what someone is willing to pay for it.”

The difficulty today is that more than half the sales in San Diego involve foreclosures and short-sales – homes sold for less than the loan balance – and relatively few nondistressed properties are on the market. There also is a preponderance of low-cost, starter homes for sale and a paucity of moveup and high-end homes, whose owners don't want to sell unless they absolutely have to.

Global Insight said downward pressures in the distressed markets are “clearly magnified” but the company did not quantify the impact.

University of San Diego housing professor Norm Miller said the Global Insight finding “makes sense” and represents a “useful exercise.”

“We tend to always be moving toward the fundamentals,” he said. “When you get these adjustments away from the fundamental values, they usually happen quickly and movements toward fundamental values always happen slower.”

He said the normalized values that Global Insight has estimated back to 1985 represent a reliable indicator of where San Diego prices should be.

But he said the Global Insight model does not reflect short-term changes in interest rates and lender underwriting standards or the stop-and-start nature of the building industry.

“You have to use all models with caution, but this is an excellent indicator,” he said. “When you see markets overshoot on the downside, they will head up and probably so. This is as good a forecast as most.”

As for San Diego, whose normalized median price since 1985 has risen without pause, according to Global Insight's model, Miller said environmental and zoning rules will probably remain in place to constrain supply and thus push up prices.

“So it does make sense in the long run that we will adjust back on the other (upward) direction,” he said.

 

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