zoog and ThePythonicCow,

Thanks for the opinions and I am going to respond to both of you using zoog's message.

Quote Originally Posted by zoog View Post
These reports tend to be conservative, in my opinion. Additionally, I think many of us here expect home prices to overcorrect, especially in markets that were extremely overvalued. So even though the valuation map indicates most of the country is fairly valued or even undervalued, I would not take this report as a sign that the housing bust has hit bottom.

Quote Originally Posted by zoog View Post
ThePythonicCow has offered a counter to your argument that houses should only be worth their replacement value: location. In many areas of the country, homebuyers tend to shun older houses (even 10 to 20 years old) in favor of new homes. I think it is no coincidence that these areas of the country have a large supply of buildable land. Why buy an old house that needs some work, when you can just clear a farmer's field and build a brand new house only a couple miles away?
There is also economic justification for a decision like that. Sometime around the end of WWII we turned from a country that used to build homes meant to last to homes that were cheaply and quickly put together. A 20 year old house is probably looking at extensive renovations, roof, HVAC system, plumbing and electrical plus modernization of the kitchen and bath(s). In a good sized home you could easily drop $100K. Instead take that $100K plus the cost of the older home and build what you really want.

Quote Originally Posted by zoog View Post
In old, large, densely developed cities those older homes become more valuable, primarily because most of the available buildable land is many miles away from where most people work, play, shop, etc.
Here the valuation still holds true but the price of the lot is the only difference. Admittedly, a house needs to be bought and torn down so that a new one can be built but there is a cost assigned to that number that should indicate real value.

Let's assume that a rundown house goes for $400K in BigCity America where most of the comparible houses are selling in the $800K range. The cost to demolish the house is X and the construction cost for a house similar in size to the comps is Y. If we assign a value to X of $50K and Y of $200K the reality is that the comparable homes should have no higher value than $650K and even that number equates an older house as having the same value as a new one.

Quote Originally Posted by zoog View Post
I agree that energy costs will factor into further declines in housing values. During the housing boom, many people decided to trade a longer commute for a newer, bigger house in the suburbs or exurbs. That was back when gasoline was still relatively inexpensive. Last year we got a taste of things to come when oil prices ramped up and those far-flung abodes started to lose their luster. There were various news reports on the subject, such as this PBS NOW program from last October, Driven to Despair.
I agree - but I was taking a different tangent.

I lived in Vermont for a number of years (no Newhart jokes please) and when we moved in 2005 energy prices skyrocketed. A friend of ours received a his "budget" for oil heat for the 2005-2006 heating season as being $730/month. Previously, he had been paying $165/month. It literally became cheaper for him to bulldoze his house and replace it with an ultra energy efficient home.

I would suggest that it is only a matter of time before heating oil climbs above $5.00 gallon and the majority of these "older homes" are fed to the local landfill.

In other words, land value plus replacement cost should equal true real estate valuation.

Quote Originally Posted by zoog View Post
It's worth reviewing EJ's March 2006 housing bubble correction update focusing on the geographical aspects of the housing bubble. Rising energy prices will put more downward pressure on home prices in exurbs and suburbs of major cities. Ironically this may actually put some upward pressure on home prices closer to city centers as people move back in. Given the much-reduced availability of credit however, most exurban and suburban home sellers (or "foreclosure-ees") will be renting, not buying.
Well, yes and no - not that I am disagreeing with EJ - but it leaves out variables like how many people will adopt telecommuting and other ways that technology will impact our lives.

In fact, telecommuting itself may create an ripple effect where people in rural areas or even the exburbs may end up exerting wage pressures on the people in the more expensive urban areas as they can do the same work for less due to lower cost of living.

But I digress.