US properties undervalued
Residential property prices in the US are nearly 20% undervalued, especially in the states of California, Nevada, Michigan and Ohio, when compared to global markets, according to a new report.
States where properties are the most overvalued are Delaware, Montana and Oregon, as well as Washington DC, according to the information from independent macroeconomic research consultancy firm Capital Economics.
The firm’s US economist, Paul Dales, says in a separate report that prices will continue to fall, but that this will probably not trigger another economic downturn.
Dales also notes that prices on a national level increased on average 3 to 6% in 2009. But that trend will likely end, with prices falling another 5%, unless the government extends the homebuyer tax credit.
The first report from the company’s chief property economist Ed Stansfield, found that in many countries, but not the US, the house price-to-earnings ratio remained above the levels required to sustain a healthy mortgage market.
But in US the economy is characterized by factors like growing unemployment, a dip in net wealth and an aversion to taking on debt, which outweigh potential market stimuli such as federal tax credits and low interest rates.
The situation is not the same in other global markets, potentially explaining why housing remains overvalued, despite an abundance of the population hurting during an extended period of global economic doldrums. Employment in the UK and Australia, for example, remains resilient.
‘If the tax credit wasn’t boosting demand, sales would not have accelerated so spectacularly in the months ahead of the original end of November expiration date and then collapsed in December,’ said Dales in his report.
Meanwhile a new programme to stem the rising number of foreclosures in the US takes effect next month as concern increases about the estimated five million property owners who are behind with their payments.
The new approach, which kicks in on April 5, will pay some home owners to sell amid fears that millions of foreclosures could delay or even reverse the US economy’s tentative recovery.
It will encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification programme to go through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.
Under the new programme, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in ‘relocation assistance’.