Guess What? Your Home Is Undervalued!
A recent report by Capital Economics, a British research firm, looks at the ratio between average home prices and the income earned by average homeowners. The ratio is now very low, according to the report, suggesting that homes in the U.S. are undervalued by nearly 20 percent. The same report finds that homes in Europe are over-valued by more than 20 percent -- and Australia's by 40 percent!
What explains the disparity? It seems European homeowners have resisted selling their homes after prices began to fall. That created a shortage of homes on the market and kept prices from falling all the way back to their normal range. In contrast, in the U.S., the massive number of foreclosures have forced millions of people out of their homes. The resulting foreclosure auctions have flooded the housing markets and driven prices far below their normal range in relationship to homeowner earnings, especially in states with high rates of foreclosures like California, Nevada, Michigan and Ohio.
Capital Economics doesn't expect U.S. home prices to rise immediately, however. Instead, gyrations in the economy, from job losses to continued high rates of foreclosures, are likely to push home prices down another 5 percent this year before prices begin to rise, unless the federal government once again extends its homebuyer tax credit.
But in the long term, the analysis implies that there is real value in homes that is not captured in current low homes prices, and that eventually prices should rise to reflect that value. And to that we say: Cheerio!