Homes May Be Undervalued Today

After dropping for two years, home prices appear to be bottoming out, and any further declines would be an overcorrection, NAR Chief Economist Lawrence Yun told thousands of practitioners at the REALTORS® Midyear Legislative Meetings in Washington, D.C., on Thursday.

The median national home price today is about $169,000, down almost 14 percent from a year ago and an estimated 30 percent from its peak. Today’s prices are justified by the fundamentals of the economy and may even represent an undervaluation, Yun said.

Lender Policies Hinder Recovery:

Distressed sales, which today comprise about 50 percent of transactions nationwide, are creating market distortions in otherwise stable neighborhoods. “We’re only capturing transaction prices,” he said, and those prices might be 20 percent to 25 percent below actual values. For that reason, it’s possible that widely cited projections that a third or more of homeowners are underwater might be off the mark, he said.

The consequences of these missed projections could be huge. Lenders, shying away from refinancing mortgages of troubled owners, exacerbate the downward spiral of homeowners’ financial position and that, by extension, hurts the broader economy.

Contributing to the problem is the lack of reasonably priced financing for higher-cost homes at a time when declining prices, low rates, and the home buyer tax credit are helping the entry-level market.

Indeed, while housing overall is at a 9.5 month supply, down from double digits not that long ago, homes above $729,750—the threshold for jumbo loans—face a 40-month supply.

Key Test:

By summer, all of the incentives that have been put into place by the government will have had several months to work, Yun said. If sales start picking up significantly, then prices should stabilize and trigger a broader economic recovery.

If sales don’t show a significant response, then the federal government might have to look at another big injection of funds into the economy, something no one has an appetite for.

Yun’s forecast reflects the brighter scenario: “My projection is home sales will be 10 to 20 percent higher the second half of this year than last year and we will come out of this recession in 2010,” he said.

—Robert Freedman, REALTOR® Magazine