March 8, 2011

Research Firm Says U.S. Housing Has Never Been This Undervalued (DSNews)

The research firm, Capital Economics, has found that housing has never been this undervalued, according to an article by Carrie Bay published in DSNews. The following is an excerpt from the article.

“The continuing depreciation of residential property values at the end of last year has made housing look more undervalued relative to income than ever before, according to analysts at the research firm Capital Economics.

Based on the latest Case-Shiller home price index, Capital Economics’ study shows that in the fourth quarter of 2010, housing was 21 percent undervalued when compared with disposable income per capital.

Looking at data included in the index published by the Federal Housing Finance Agency (FHFA), the firm found that housing in Q4 was 15 percent undervalued as measured against individuals’ disposable income.

Capital Economics says its results illustrate “housing is exceptionally undervalued,” and the gap is getting bigger. In its third quarter 2010 report, the research firm pegged the Case-Shiller index readings as 19 percent undervalued and the FHFA index as 14 percent below what would constitute a balanced housing value in relation to income.

The recent fall back in house prices, coupled with low rates, explains why the initial monthly mortgage payment on a median priced house bought with a 20 percent down payment has fallen to a record low of 13 percent of the median income, Capital Economics pointed out in its report.”

With home prices hitting a new cycle low in 29 states in the fourth quarter of last year housing now appears to be closer to fair value when set against rents.

“Such favorable valuations mean there is plenty of scope for housing to perform well in the medium-term, according to Capital Economics, but over the next year, the firm says the combination of weak demand, high supply, and more forced sales of foreclosed properties will push prices lower.”

With the sharp fall of the mortgage delinquency rate at the end of 2010, there will be fewer homes in the foreclosure pipeline but the increase of defaulted properties still in process means home values will continue to be negatively effected by these distressed properties for a while. In addition to the low prices, mortgage rates have recently been on the decline as well. When you add low mortgage rates into the equation with declining home prices, Capital Economics says, “The incredibly favorable affordability and valuation environment is the housing market’s one big positive.”

Full Article

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