Plenty of Undervalued Homes in the Market Today

by Simon Lindsay on Real Estate Investing

A report released today revealed something about the real estate market that we’ve been preaching about for a while now: There is an abundance of undervalued homes on the market that are ripe for the picking.

A study surveyed metropolitan areas in the country and found that 42 metro areas – areas with over 200,000 people – that were undervalued, in that the price-to-income ratio was lower than the historical average. Let’s take Las Vegas, for example. In 2000, the median household income was $44,069, and the median home value was $137,000. This is a price-to-income ratio of 32%, or roughly 1-in-3. This means that the median home price was roughly three times the median household income, which was the norm for 1985 through 2000.

Now, the median household income is $53,000, and the median home price is $115,200. The resulting ratio – 46%, or roughly 1-in-2.2 – means that the average home is drastically undervalued. If your typical home costs only 2.2 times what a typical household makes now, whereas 11 years ago the home was three times the income, you know that home values have fallen dramatically.

This means that homes in these 42 metropolitan areas are, in a word, cheap. They represent homes that are very affordable for your typical American family, which means there is a lot of upside potential for investors looking to strike it rich in the real estate market. True, the report also revealed that many metro areas – namely Los Angeles and New York – are overvalued, but one can expect those values to be inflated no matter what the economy is like.

Detroit is another area that is severely undervalued. Median home prices are a jaw-dropping $78,000. They are rising, but they still have quite a ways to go before the price-to-income ratio is anywhere near the historical average. Right now, the median household income is $29,526, giving us a price-to-income figure of 37%. Even better is the fact that the median foreclosure sale price is $36,026 – a price-to-income figure of nearly 82%.

That is a lot of potential profit for an investor who wants to buy low and sell high when the real estate market recovers. It’s hard to imagine another time in the near future when homes will be this affordable.