Home Prices Remain Far from Bubble Territory

While sharp increases in home prices may appear to stoke fears of another housing bubble, prices are still undervalued in 83% of the largest metros, according to Trulia’s Bubble Watch.

Nationally, home prices are 4% undervalued in the fourth quarter of 2013, meaning the market is nowhere near another housing bubble, writes Trulia’s Chief Economist Jed Kolko. 

Trulia’s Bubble Watch reveals whether home prices are overvalued or undervalued relative to their fundamental value by comparing today’s prices with historical prices, incomes and rents. 

In other words, the more prices are overvalued relative to their fundamentals, the closer the market is to a housing bubble. 

To put this into perspective, Kolko explains home prices were as much as 39% overvalued during the first quarter of 2006 at the height of the last housing bubble, before dropping to 15% undervalued during the fourth quarter of 2011.

At the metro level, 17 of the 100 largest metros reported home prices that were above their fundamental values.

While most of these metros were overvalued only slightly, Orange County and Los Angeles were the only two areas the reported home prices that are at least 10% overvalued. Compared to the third quarter of 2013, home prices in these areas are 13% and 12% overvalued, respectively.

Both metros also saw sharp annual increases in asking prices, as on a year-over-year basis, Orange County saw a 23.4% hike in asking prices in October, while Los Angeles saw a 22.5% increase during the month.

Fears of another housing bubble may have been stoked given the 11.7% annual increase in asking prices recorded in October, Kolko suggests, as this year-over-year gain was roughly the same sharp increase as in the third quarter of 2004 when the housing bubble was inflating.

When looking at the fundamentals of today’s housing market compared to the pre-bubble market, it appears that home values are still far from entering bubble territory.

“But, aside from similar sharp price increases, the housing market today is very different than it was in 2004 Q3,” writes Kolko. “The key is that level of prices, relative to fundamentals, is much lower today than in 2004 Q3.”

In Q3 2004, home prices were 24% overvalued compared with 4% undervalued today. Additionally, in Q3 2004, 99 of the 100 largest markets were overvalued, compared to today’s 17 out of 100.

Read the Trulia Trends post.

Written by Jason Oliva

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