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The real estate website Trulia is reporting that homes in Las Vegas remain undervalued by 24 percent, despite price increases over the past year, the lowest in the nation, even topping Detroit, which is in second place at 23 percent undervalued. This number is obtained by comparing current pricing to historical prices, incomes and rents. Incomes, of course, indicate how much people are able to pay for housing. As we learned in 2004 to 2006, when housing prices increase too much relative to income, those prices become unsustainable. Rents indicate how much people value housing.

Elevated foreclosure rates have kept rental demand high, which has drawn investors in to purchase distressed inventory. This increased demand has resulted in stabilizing prices, with the effect of creating acute inventory shortages, especially in the lower priced houses. Another result is that rents in Las Vegas have decreased over the past year. We’ve blogged earlier that Las Vegas now has more investor owned properties than owner occupied.

Rising prices will allow more homeowners to escape being underwater. Those homeowners who have been waiting to sell will be able to put their homes on the market , easing the inventory shortage. Nevertheless, even as prices reach their correct values, up to 30 percent of homeowners who purchased at the peak of the market will remain underwater. As result, it could take up to two years for prices to achieve a normal level.

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