Experts mull over housing bubble expectations

Market indicators signal bubble boom and burst? Yes.

Despite rapid increases in home prices over the past year, prices are 4% undervalued in the fourth quarter — meaning the market is nowhere near another housing bubble, Trulia (TRLA) claims in a new report.

To put it into perspective, prices were as much as 39% overvalued in the first quarter of 2008 — at the height of the bubble — then dropped to being 15% undervalued in the fourth quarter of 2011, the real estate firm says.

"If prices nationally are 4% undervalued, why are so many people worried that a new bubble is forming," questioned Trulia chief economist Jed Kolko.

He added, "Because prices have risen quickly over the past year, and even with the recent slowdown in the past few months, rising prices stoke bubble fear."

In October, asking prices were up 11.7% year-over-year, which is roughly the same sharp increases seen in 2004 when the housing bubble was inflating.

Consequently, some market analysts believe that housing is in the depths of a bubble.

Given the fact that home prices are rising faster than real median household income as well as mortgage purchase applications, it signals the same factors experienced in the previous housing bubble, explained George Mason University finance professor Anthony Sanders.

"For the average American household, they are in a housing bubble," he said. "For Chinese and other domestics and foreign investors, house prices are a bargain."

However, other combat this conclusion and believe that measuring previous housing bubble metrics to today’s current industry is counterproductive.

They key is that the level of prices, relative to fundamentals, is much lower today than in 2004.

For instance, prices were 24% overvalued in 2004, compared with 4% undervalued today, Kolko pointed out.

What the market witnessed over the past two years was a bounce off the bottom after a precipitous drop in home prices – an overcorrection in a lot of markets during the downturn, explained executive vice president Rick Sharga.

"If home prices had continued to appreciate at 10-20% a year, we would have inevitably created a new bubble," Sharga stated.

He continued, "Instead, we've seen market forces behave they way they're supposed to: rising prices and higher interest rates led to lower affordability, reduced demand, and a slowing in home price appreciation."

At the metro level, home prices are above their fundamental value in 17 of the 100 largest cities.

Several California metros stand out for having both overvalued prices and sharp price increases, including Orange County, Los Angeles, Oakland and the Riverside-San Bernardino area,Trulia noted.

With extremely tight credit standards and the obstacles set in place for most borrowers to obtain a loan, the fuel needed to create another bubble simply doesn’t exist.

"Lending will tighten further when the qualified mortgage rule goes into place, and the economy isn’t created enough high-paying jobs to stimulate another overheated housing market right now," Sharga said.

He concluded, "We may actually see prices decline slightly over the next two quarters before edging up again later in the year."

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