Is that house overvalued? Here's how to determine the true worth of your biggest investment.

Buying a home is perhaps the biggest investment most Americans will ever make. According to the Office of Federal Housing Enterprise Oversight, price appreciation for single-family homes nationwide has increased more than 50% during the last five years. Prices for single-family homes went up more than 100% in Washington, D.C. and California during the same time period.

This record housing price appreciation has many would-be home buyers trying to determine whether to purchase now before prices increase or wait for prices to drop to more attractive levels. Whether you purchase now or later, experts say first figure out whether a house is overpriced.

Buyers should study an owner's asking price, the sales patterns in the neighborhood where they plan to buy, and the stability of the economy that most closely affects that neighborhood. Find out the asking price per square-foot in comparison to similar houses sold in the same neighborhood in the previous six to 12 months.

To get a better idea of the value of a property, Freddie Mac Deputy Chief Economist Amy Crews Cutts recommends checking how long a house has been on the market, how many times its asking price has been lowered, and the percentage of rental houses on the same block.

"It's not a problem if there are one or two rental houses on a street, but if there are 10 or 11, [the houses] could be overpriced because owners don't tend to put as much money into rental properties, and the typical renters won't keep them up either," says Cutts. In a down market, rentals are the first to be listed for sale because owners find they can no longer charge enough rent to cover the house's mortgage.

Prospective buyers should also research how fast prices have risen for the desired house and neighboring homes in comparison to historic average price increases. (Use the OFHEO House Price Calculator at www.ofheo.gov). During the last 50 years, Cutts says home prices have grown an average 5% per year nationwide.

Federal Housing Finance Board Deputy Chief Economist Joseph A. McKenzie says high growth rates may reflect the scarcity of land but warns, "Clearly appreciation rates of 20% or more should give a buyer pause as to whether a property is overpriced." That's because housing prices are growing much faster than household incomes.

If housing prices do fall markets won't be affected. Historically, declines in housing prices have been caused by a drop in the local economy. "The market won't spontaneously combust," says Cutts, advising that a house is probably worth buying if renting will cost as much as its mortgage.

HIGHEST HOUSE PRICE APPRECIATION BY STATE *

(% CHANGE IN HOUSE PRICES)

State                  1-Year   5-Year

Nevada                 31.22%    84.70%
California             25.42    103.02
Hawaii                 24.36     82.94
District of Columbia   22.21    108.12
Florida                21.42     80.54
Maryland               20.97     77.94
Arizona                19.43     52.71
Virginia               18.57     67.47
Rhode Island           17.05     97.57
New Jersey             15.84     76.46

* AS OF MARCH 31, 2005

SOURCE: OFFICE OF FEDERAL
HOUSING ENTERPRISE OVERSIGHT