Building Your Own Home Booms Again

A great time to build, or buy, your own home.

Home prices are now so low that US houses are now actually undervalued. By the end of 2009, the US was 8.9% undervalued when weighted by market value, and 10.3% undervalued when weighted by housing units, according to IHS Global Insight, an international financial analysis and consultancy firm.

A 9% undervaluation implies that on the average a buyer will pay $455,000 for a property worth US$500,000 based on housing fundamentals. The analysis was based on a study of actual house prices in 300 metropolitan areas from 1985 to 2009. The fundamental house price was based on the area’s population density, average household income, accessibility, and other factors. The undervaluation was in sharp contrast to the 16.6% overvaluation in Q4 2005 near the peak of the house price boom

Yet builders are putting up thousands of homes, and they are frantically buying lots for more.

People are buying again. From the recession's lows, construction has nearly doubled in major metro areas. It is up 74 percent in Southern California and soaring in Florida.

Some of the demand is coming from families that are getting shut out of the bidding for foreclosures by syndicates that pay in cash, and some is from investors who are back on the prowl.

Land and labor costs have fallen significantly, so the newest homes are competitively priced, according to Case Schiller (The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States.)

New-home sales in March rose 27 percent. One major Southwest builder has bought up more than 700 lots and is on the verge of starting a new community. Why? Because they are selling. New homes sell.

Many buyers are not interested in foreclosures even at a reduced price. They want to build their own.