Is US property cheap yet?

US house prices have fallen back to where they were in 2000, and by some measures now look cheap. But that doesn’t mean it's time to buy, says John Stepek

Is US property starting to look cheap?

During the first quarter, US property prices in the 20 cities measured by the Case-Shiller index fell by 7.5%. That was down 19.1% on the year, and a full 32% since prices peaked in 2006.

Now, says Paul Dales at Capital Economics, prices are back to where they were in 2000 (adjusting for inflation). "In other words, most of the boom in housing has now been reversed."

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So is it time to buy that holiday home you've had your eye on?

Is it time to buy US property?

US house prices are now back where they were in 2000. In other words, anyone who bought a home in the US between the tech bubble peaking and the credit bubble bursting will have lost money.

However, now that most of the boom gains have been wiped out, US property is starting to look as though it's reasonably valued again on a number of measures, says Paul Dales of Capital Economics. If you take the long-term average of house prices to disposable incomes, then housing is cheaper than at any time since the Case-Shiller index series began in 1987, at 18% below fair value. And judging by house prices to rent, housing is 9% undervalued. At the peak, says Dales, valuations were 35% overvalued compared to incomes and 45% compared to rents.

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So is it time to get on to your foreign currency broker and start stocking up on dollars for a State-side spending spree?

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Not so fast. As Dales points out, "none of this means that prices won't fall further." As with any other asset, from stocks to art, when prices crash from bubble-type valuations, they tend to fall far below what would be considered 'fair value'. For example, prices in California fell for six years during the early 1990s, and in fact didn't return to their 1991 peak until 2006, according to the Federal Housing Finance Agency.

"There are very few V-shaped recoveries in the history of real estate, and this one is likely to be even slower because of the size of the bubble," as Yale University's Robert Shiller tells Bloomberg.

The housing market's nowhere near recovered

And more to the point, the housing market is nowhere near being out of the woods yet. There is a large inventory overhang in other words, there are a lot of spare houses out there. And a lot of those properties are "distressed assets" that is, repossessed properties that will end up being sold at fire-sale prices. Bloomberg cites data from the Federal Deposit Insurance Corporation suggesting that banks already hold $11.5bn of homes. "This will keep downward pressure on home prices," as Michelle Meyer of Barclays Capital puts it.

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On top of this, according to Bloomberg, there are plenty more loans set to go bad. For example, there are more than two million Alt-A loans in the US. Alt-A loans aren't quite sub-prime, but they're certainly not prime either. A significant proportion, known as option ARMs, start off with low monthly bills, before resetting to a higher rate at a later date. But with prices falling and rising unemployment, many such homeowners may find their payments become unaffordable when this happens.

"We're about to have a whole wave of option ARMs", Rick Sharga of RealtyTrac tells the newswire. "These will probably default at rates even higher than subprime." Already a further $40bn-worth of home loans have payments 90 days or more overdue suggesting there are a lot more foreclosures to come.

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So while house prices in the States might be starting to look inexpensive, they are set to get a lot cheaper before this crash is out.

What does this mean for Britain's house prices?

There's a clear lesson for the UK here, as Allister Heath says in City AM this morning. Our crash began a good year or more after America's, and yet some pundits are already lining up to suggest that it might already be as good as over. They're wrong. "House prices can fall by far more and for longer than people usually imagine."

And our own banks made plenty of bad loans during the housing boom too. Even the comparatively saintly Nationwide reported this morning that full-year profits had halved, partly down to a sharp rise in provisions for bad debts.

With unemployment rising, and both banks and consumers more concerned about getting rid of existing debts rather than taking on new ones, the housing markets on both sides of the Atlantic have a long way to fall before we see any sign of a genuine recovery.

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