With home prices continuing to rise year-over-year, despite recent slowdowns, market commentators and analysts are asking yet again if the nation has hit another housing bubble.
Trulia chief economist Jed Kolko says the answer is complicated, and that signs point to yes and no.
In the company’s latest quarterly Bubble Watch report, Kolko estimates national home prices are approximately 5 percent undervalued when considering elements such as historical prices, incomes, and rents. Continued price improvements have brought the market close to a tipping point, but he notes it’s nowhere near the 39 percent overvaluation in the first quarter of 2006.
“Even though recent double-digit price gains look unsustainable, current national price levels are not cause for alarm,” Kolko stated in a blog post. “Sharp price gains, like we’ve had in 2012 and 2013, are not the sign of a bubble unless price levels look high relative to fundamentals.”
Additionally, “the slowdown in price gains make[s] it less likely that we’re heading for another bubble,” he added.
The national market remains undervalued, but conditions are widely varied at the local level. According to Trulia, of the 100 largest metro markets, home prices are overvalued in 19, including 8 of the 11 largest California metros. The greatest danger is in the southern half of the state, in markets like Orange County, Los Angeles, and Riverside-San Bernardino—which make up three of the five most overvalued markets in the country.
While the number of overvalued housing markets continues to increase, Kolko again says historical perspective is required. “In 2014 Q1, prices were overvalued in 19 of the 100 largest metros, which is in the highest number since 2009 Q4; furthermore, prices were overvalued by more than 10 percent in 4 large metros, which is the highest number since 2008 Q4.
However, at the height of the bubble, all 100 were overvalued, and 91 were overvalued by more than 10 percent.”