Housing affordability declined somewhat in recent months but steep drops in home prices are keeping home values relatively low, Capital Economics said in a new report Monday.

The economics research firm noted that mortgage rates are still declining and even though home prices have seen basic gains, housing in May was still 22% undervalued.

"That said, tight mortgage credit conditions mean that many households are unable to take advantage of the fact that housing now appears so cheap," Capital Economics said. 

When analyzing the overall economy, Capital Economics noted that payrolls rose more than expected in July with 163,000 positions gained while gross domestic product growth remained subdued in the second quarter.

In fact, in a new report from property economist Paul Diggle, he asserts that "Q2 GDP figures confirmed that the economy has lost a lot of momentum."

"Despite acknowledging the slowdown in the economy, the Fed did not opt for further quantitative easing at last week's meeting. A new round of large-scale asset purchases — probably of mortgage-backed securities — at September's meeting looks likely. But the huge increase in the monetary base has yet to trigger renewed growth in bank loans," Diggle said.

Other trends reported by Capital Economics include data that shows a high level of negative equity in states such as Florida and Nevada. This trend hurts overall supply in those areas, the report said.

Meanwhile, the overall supply of homes for sale is falling while conditions in the rental market are tightening.

"[P]ending home sales are still running at a level that looks consistent with renewed growth in existing home sales," said Diggle. "What’s more, the pick-up in outstanding orders at major public homebuilders in the second quarter points to future gains in new home sales. In any case, given that the number of homes for sale also fell in June, and has declined by 23.8% over the past year, the overall balance between demand and supply still looks consistent with year-on-year growth in house prices."