Today I've got an interesting article for you on home values. The author of this article is arguing that home values are way higher than they should be, perhaps as much as 70%. My main point here isn't to agree or disagree, but merely to point out that you should be careful when you read opinions and realize that even with a mountain of data, it's extremely difficult to draw meaningful conclusions.

For example, I've also read articles by very smart people stating that home values are actually UNDER-valued. This is based on the fact that even though prices are higher than they've ever been, we're making much more money than we used to and interest rates are lower. Also, there's a lot more demand since many people are buying second homes and many people that couldn't normally own a home now qualify thanks to an expanded secondary market for mortgages.

Remember, there are always two sides to every argument!

Home Loans and Mortgages – One Third of Homes in U.S. Overvalued
by: Charlie Essmeier

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.