Overvalued Housing Markets are Victims of High Home Prices, Low Incomes
Now that median home prices have plummeted farther than ever before, those in the industry are asking the obvious question: Why?
Typically, rising mortgage rates and selloffs by skittish real-estate investors have helped depress housing prices in many metropolitan areas. But there’s another factor that many observers miss: the relationship between home prices and incomes.
When the cost of housing in a given area grows far faster than local wages and salaries, the pool of potential buyers shrinks, and prices are much more likely to sink, as explained by an article in the Wall Street Journal Online.
For the past five years, SmartMoney magazine has worked with Ingo Winzer, president of the consulting firm Local Market Monitor, evaluating home-sale prices against local income to determine whether a given market is overvalued, undervalued or fairly valued (see chart).
According to Mr. Winzer, any market that’s more than 30% overvalued is due for a correction. In the fall of 2003, only eight markets on the list of 152 fit that description; on this year’s list, 37 did. Sure enough, price decreases are beginning to pop up in many of the markets that have shown up year after year as the most overvalued - especially in Florida and California housing markets.
What do you do if you’re in a falling market?
Obviously, that’s a promising climate for a bargain-hunting buyer. This individual should decide between home mortgages and apply ASAP. A savvy real estate agent can help you craft a bid that’s low enough to save you money, but realistic enough to be accepted.
When one of Frank Borges LLosa’s clients finds an appealing home, the Northern Virginia mortgage broker searches the history of the selling agent - data not available to consumers - on the local multiple listing service. If the agent frequently sells below the asking price, Mr. LLosa knows he can be aggressive.
Listing archives can also help buyers figure out the right bidding range. Ask your agent to comb the MLS for “pending sales,” deals that are in contract but haven’t yet closed, to get an up-to-date sense of price ranges in your market.
In an ideal world, you wouldn’t sell a house at all while prices were falling. But if you must, experts agree that it’s best to act quickly, before prices slide further.
Often, that means sucking it up and offering the best price to get potential buyers in the door. Here again, getting your agent to tap pending-sales data can pay off. Pay attention to the pricing per square foot for homes similar to yours, and set your asking price at the bottom of, or even below, that range.
South Florida broker Mike Morgan recommends that his clients take 1% to 3% off the price every week until they get an offer.
If you don’t have to sell your home, the short-term turmoil underscores the point that it seldom makes sense to obsess over your home’s value. Better to sit back, enjoy your mortgage-interest tax deduction, and wait for better days.