This is really about the most overvalued and undervalued housing markets in America. There is an image with this article that I encourage you to look at after reading this post.
Here’s what I want to make sure you get more than anything from this article; if a market is overvalued then that means that market is more than likely not going to increase in value anymore, and it’s going to drop in value sooner than other markets.
Why would a market be overvalued? Shortage of inventory; people needing houses so they are bidding up housing to get into them. If that is the case, that means that you are probably facing speculative investing going into that market.
It’s a very short play 3-6 months and get out, and see what the market does. So that’s something that you need to look at.
In an undervalued market, it is a great opportunity. This means that this particular market has lots of room to grow, leading to us seeing appreciation in that market.
I’ll give you an idea. The chief economist at Trulia.com argues that the U.S as a whole, home prices are 3% undervalued compared with their long term fundamental growth or expectation you could say.
With that said, this is always a theory that people have and there is a lot of different ways that we research theory or how we research what the growth should be to see if it’s overvalued or undervalued. A lot of those statistical processes come from price to income ratio or price to rent ratio. GRM’s or cap rates are what we see as economic indicators showing potential for growth. You could actually bring in the per capita income process. You could start tracking lumber pricing and building permits.
There are all these things that we can track to base our theory on. Theories; however, are just that, a theory based on observations based on data gathered to try to predict what the future outcome will be.
We can do that by looking at past data and current data to try to help us know what the future has in store for that area. However, at the end of the day, it’s always going to be risky until you know how to do your own research.
One of the things that we do at our 3 day boot camp is cover market segmentation to help us understand where markets are going, when properties are moving there, and when they are not moving there. I think you should be there. If you haven’t gotten registered for the workshop, you should probably do so. I encourage you to do that.
In the meantime, I want you to read this short article here. Check out the chart that they give you for the overvalued and undervalued markets, and determine if this an area you are in, and what strategy you should use. If this is an area you are not in, maybe you want to start investing in this area; especially if they are undervalued! This way you can push and bank on that upswing of appreciation that is going to get created.
That’s my 2 cents, leave me some comments stating yours.
By Mamta Badkar June 29, 2014 12:29 PM
To gauge whether home prices are over- or undervalued, Kolko considers “the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trends using multiple data sources.”
But housing is as much a regional story as it is a national one — and regional markets are markedly different.
The most overvalued housing markets are largely located in California, but again, Kolko doesn’t think these are in bubble territory.
“Orange County, today’s frothiest market, is just 17% overvalued now versus being 71% overvalued in 2006 Q1,” he writes. “Among the most overvalued markets today, only Austin looks more overvalued now (13%) than in 2006 Q1 (8%) – and that’s because Austin (and Texas generally) avoided the worst of last decade’s bubble and bust.”
Meanwhile, home prices are the most undervalued in Ohio. “But in several of the most undervalued markets, including Detroit and Chicago, prices are now rising year-over-year in the double digits,” writes Kolko. “But those markets are unlikely to stay on the most-undervalued list for many more quarters.”
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