The two things I consider as fundamental are rent vs buy and income vs buy. If it reach equality in term of monthly payment on a 30 years fixed w/ 0% down to make the calculation more fair and monthly rent of a similar house, I consider that close or at fundamental. income vs buy is just used to compare a whole area. But since RE is local, you have to get down to each individual house level and see if a particular house is far or close from fundamental. Also, income vs buy will tell you what you can truly afford, but that doesn’t tell you much about how over priced a particular house is.
Here’s an example: A 1200sq-ft house on a 6000+sq-ft lot in Mira Mesa is being sold by the bank, asking $375k-$400k. If you work out the number, that would put P+I around $1900/month. A similar sized place would rent for around $1600-$1700/month. a 2bed/2bath apartment near there would rent for around $1400-$1500. So I would say it’s about 10-15% from fundamental. If you take in tax deduction, then it’s about at fundamental.
Then you have a 1500sq-ft $540k house, still in Mira Mesa. The rent of a similar house is around $1800/month. But the monthly payment of the mortgage would be around $2400/month. That’s more than 20% over monthly rent. Bottom line is, RE is even more local than just Zip Code. Every house is different and you have to do your calculation individually.
Another way to calculate to see where the fundamental is to calculate the monthly payment of a similar house around 1996-1998, add on 3-5% inflation each year, then you get a monthly payment for 2007. That’s your fundamental. This will take care of the rate difference. Who knows what the rates will be in the future. The best you can do is calculate the rate now and the price now.
