Homes are usually price based on Comparable Property Sales. This method, while the industry standard, can be subject to the "Greater Fool Theory".

It is wise to use additional methods of valuation. Two other methods would be comparing the payment to rental income, taking into consideration tax breaks. And replacement cost.

As an example: I will use a property that is an excellent value. 6029 Loynes in Long Beach, CA. See Our Listings to the left for further details.

Here is why this property is an excellent value.

1) The property would rent for around $2,800 - $3,000 per month. The list price is $569,000. With 10% down the loan payment would be around $3,500 - $3,800 per month, but with the tax breaks the effective payment would be around $2,500-$2,800. In otherword, the property costs less to buy (with tax breaks) than to rent.

2) Replacement cost - The property is 2,159sf. Currently construction costs run around $200 per square foot. The structure alone would cost $430,000 to build and that means you get a golf course adjacent, Belmont Shore location for only $150,000 for the dirt. You simply could not build this property including the land for as cheap as it is selling.

This is just one property, but it makes the point that Real Estate values have VERY QUICKLY returned to a fair market value.

This property would have been around $725,000 at the peak. Breaking out my handy dandy calculator. That gives me a 24% drop (if the property sells for $550,000).

That is just about the drop we had from 1990-1995.

What do you think?