Using Income to Judge Home Values

The housing market might be more confusing now than ever. The last two years of prices plunging and a host of foreclosures made sense following the meteoric years preceding the recession. Right now though, the country is witnessing “an extreme mix of conditions,” according to Zillow.

In Zillow’s Q2 Real Estate Market Reports, home values actually rose in 61% of the markets covered. And yet, values were still falling nationally. But what Zillow discovered was that using the price-to-income ratio as a gauge painted a pretty accurate picture about where a house’s price should be.

If you’re looking to sell or buy, the ratio can help you understand whether or not a house is over or undervalued for its market. According to an article The Wall Street Journal ran, “While the nation's housing markets largely fell and rose together during the housing boom and bust, they aren't likely to hit bottom and begin recovery at the same time or pace.”

In fact, there were a number of cities were the houses were overvalued. These markets may see further declines in home values, or they may stabilize where they are but remain flat for a longer time until income growth catches up. Cities like Virginia Beach, Honolulu and Charleston are overvalued right now.

“These cities would need to fall by at least 50% to reconnect with traditional income levels,” according to Zillow. “That doesn’t mean values will fall by 50% in those markets, but it could signal either a significant change in their economies, or that home values do have somewhat farther to fall.”

Approximately one-third of the markets ZIllow studied are below their historic norms. Unsurprisingly, Las Vegas and Detroit — 25% and 35%, respectively — are well below historic price-to-income levels. According to Zillow, it seems like home prices in Las Vegas seemed to have “over-corrected, and may have some room to rise again before the market reaches equilibrium.”

And despite how far the U.S. real estate market has fallen, Zillow still has overall housing prices 14% overvalued.

Go here to see how your market stacks up.