Homes in some markets are undervalued, report says

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Home prices in 42 U.S. metropolitan areas including Las Vegas and Detroit are undervalued compared with historical average prices, according to a brief by real estate website Zillow.com. In areas such as Los Angeles, New York and San Francisco, though, prices are at a premium compared with historical averages, the website says.

Zillow uses a ratio that compares the median price of a home in metro areas with the median level of household income in that area. Historically, from 1985 to 2000, home prices were about three times the median household income. That ratio started growing during the housing bubble, until the end of 2005 in the U.S., when home prices were 5.1 times median household income.

Since then, the price-to-income ratio has fallen to 3.3% nationally. But in 42 metro areas, that ratio has dropped to lower than historical levels. In California, price-to-income ratios in Stockton and Modesto are 19% and 18% lower than they were historically. In Fresno, the ratio is 7% lower than it is historically.

On the flip side, the price-to-income ratio in 85 metro areas is higher than average. Those areas include Napa, Ventura, Los Angeles and, oddly enough, Riverside.

Zillow says that price-to-income ratios in areas such as Detroit may not return to historical levels ‘because of fundamental changes in local housing demand.’ On the other hand, in some metro areas, homes require less income than they once did, which could make them appealing to buyers.

‘This, in turn, might suggest that demand for housing in these markets will increase as buyers take advantage of this value proposition,’ wrote Svenja Gudell. This will in turn produce ‘a stabilization in home values near-term, and longer term, the potential for price appreciation.’

Beware Californians, a real estate site is telling you to buy now. Are we going to have a boom and bust all over again?

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-- Alana Semuels