A new study by National City Corp. looked at home values for 299 American
cities and compared them to where they “should be” based on a number of economic
factors that determine home prices. The results were not encouraging; homes in
nearly one third of America were judged to be “extremely overvalued.” That’s the
part that’s getting headlines. A complete read of the report shows that things
are even worse, as 100 cities in the U.S. have values judged to be too high by
18% or more. What does this mean?
It will come as no surprise to most people that the areas judged to be the most
overvalued are in California, Florida, and New York and Massachusetts. Home
prices in these states have increased at a rate that far exceeds the increases
in salaries in these areas. When homes are priced in a way that is
disproportionate to income, they become unaffordable. The mortgage industry has
come up with a number of clever solutions to this problem by introducing an
ever-increasing number of creative loan products. Interest only mortgages, where
buyers only pay interest on the loan, rather than principal, for the first five
years of the loan, and Option ARM mortgages, with “teaser” interest rates that
can run as low as one percent, have allowed people to purchase homes they
otherwise would not be able to afford. Neither one of these dangerous loan types
contributes any money to the actual purchase price of the home, leaving their
buyers in a precarious position should prices fail to keep rising. The
nationwide increase in foreclosure rates suggests that the market is probably
peaking.
What does this mean for the average buyer? Home prices in the top 100 markets in
the U.S. are overpriced by anywhere between 20% and 70%. Prospective buyers
should realize that any home they purchase now will probably not appreciate much
more in the near future, and they should finance their purchases with this in
mind. Buyers should make certain that they can actually afford the purchase
price and that they can afford a mortgage that will reduce the principal of the
loan over thirty years. A home purchase with any other terms would have to be
considered a risk, since prices are more likely to fall or stay the same in the
future than they are to rise. Use some common sense when making a purchase, and
all will be well.
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including HomeEquityHelp.com, a site devoted to information regarding mortgages and home equity loans .