U.S. house prices have soared in the last year… So how much higher can they go?

I will answer that for you today… The truth may surprise you. Let me explain…

It’s hard to believe, but house prices in some American cities (including Las Vegas and San Francisco) are up 25% in the last 12 months.

A 25% gain is a crazy move in house prices, relative to history… Before the 2006-2011 boom and bust, house price increases were pretty darn boring… On average, they’d risen at less than 1% a year above inflation.

[ad#Google Adsense 336×280-IA]With such extraordinary price gains recently… and with the recent jump in mortgage rates… you might think the rise in house prices over the last year might be near its end.

I disagree…

House prices can still go much higher from here.

By my calculations, fair value for the typical American house is somewhere between $25,000 and $75,000 higher than today’s prices.

Let me explain why… starting with a chart…

This is a chart of ACTUAL U.S. house prices (in black) versus our True Wealth Systems computers’ estimate of “fair value” of the median U.S. house (in blue):

Our fair value calculation is based on housing “affordability.” (Specifically, we’re looking at the monthly mortgage payment needed to buy the median home in America, relative to median incomes in America.)

House prices had tracked our fair value number for years… Then in 2006, they soared above it… And by 2012, they’d dropped way below it.

Now look at where we are today… Check out the huge gap between the fair value and the current price. It’s $76,000!

An important thing to note is, this chart is based on 12-month averages. But in recent months, house prices have gone up… and so have mortgage rates. These moves have had an extreme effect on affordability. If we ONLY looked at the most recent month of data, as opposed to the last 12 months, the gap would be closer to $25,000.

So I am comfortable saying that there’s still between $25,000 and $75,000 of upside potential in the typical American house – and that’s just to get us to fair value…

I actually expect house prices will go higher than that. I think they will overshoot fair value…

For one thing, people have very few good alternatives for their money today. So a lot of money will work its way into real estate. Also, real estate tends to go in cycles, with prices going above and below fair value.

I can’t guarantee that house prices will overshoot.

But I can tell you with confidence that – even after some markets are up by 25% over the last year – house prices still have plenty of upside potential… I believe the number is somewhere between $25,000 and $75,000 higher than today’s median house price…

I am still buying real estate with my own money.

Good investing,

Steve

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Source: DailyWealth