Q. I’m interested in relocating to a different area in the future so I want to learn a little more about the real estate market. I was wondering what does it mean for an area’s real estate to be undervalued? What criteria do they base that assumption on?
A. There are several criteria for determining whether or not a particular area is undervalued. The primary things are projected job growth, projected demand or migration patterns, the local money/credit market and current pricing compared to the national median home prices.
While areas like California, Florida, and the upper East Coast areas have highly inflated home prices, other areas of the nation have home prices that are well below those median costs…. Austin is one great example!
According to Forbes magazine, you’re most likely to find undervalued real estate in cities where the real estate boom was driven by sustainable factors like job growth and economic expansion. Take Charlotte, NC for instance. Their price per sq ft numbers are some of the lowest in the country and they have no inventory problem.
In contrast, throughout most of Florida, and especially in Miami and Tampa, the real estate market grew more rapidly than local economic growth would have suggested possible and undervalued property is hard to come by. The same goes for San Diego. But job growth doesn’t always insure a solid market. Phoenix has had one of the fastest-growing job rates in the country over the last five years. But much of their job growth was in the housing industry. And when the housing market drops just a few points, many jobs are affected and you have a glut of properties coupled with a large group of unemployed people.
Local credit markets also help create undervalued property. So far, the credit market seizure has mostly affected cities that are more reliant on government-sponsored enterprises–places with a high share of housing stock above Fannie Mae and Freddie Mac’s $417,000 limit.
Look for areas where jobs are up, the tech sector is growing, migration patterns are favorable and there is less supply than the market demands.
To sum up: When you have strong demand, potential growth and short supply, you have a market where the property prices can be expected to increase. So get in the market while it’s low…. it’s only going to go up.
If you have a glut of homes and growth is stagnating, property prices will decline…..along with the value of the one you have just purchased.