What Housing Bubble? Trulia Says U.S. Home Prices Still 5% Undervalued
Although national home prices rose significantly in the past two years, they’re still 5% undervalued compared with long-term fundamentals. Trulia’s Chief Economist Jed Kolko says home prices today look overvalued in 19 of the 100 largest metros, including 8 of the 11 large California metros.
Trulia’s Bubble Watch reveals whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer we are to a housing bubble – and the bigger the risk of a future price crash.
Recent price changes, by themselves, cannot tell us whether this is a housing bubble; neither can a simple comparison of nominal price levels today to where they were in the past. Asking prices in Las Vegas, for instance, are up almost 60% from their lowest point during the bust, and asking prices in Pittsburgh and Dallas are now above their 2006 highs. But none of those facts takes fundamentals into account, so none can tell us whether those local markets are in a housing bubble.
Bubble watching is as much art as it is science because there’s no definitive measure of fundamental value. To try to put numbers on it, we look at the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trends using multiple data sources, including the Trulia Price Monitor as a leading indicator of where home prices are heading. We then combine these various measures of fundamental value rather than relying on a single factor, because no one measure is perfect. Trulia’s first Bubble Watch report, from May 2013, explains our methodology in detail. Here’s what we found.
Bubbles Haven’t Broken the Surface Nationally
We estimate that home prices nationally are 5% undervalued in the first quarter of 2014 (2014 Q1), which means we’re not in a nationwide housing bubble. Remember that prices reached a high of 39% overvalued in 2006 Q1, then dropped to being 15% undervalued in 2011 Q4. One quarter ago (2013 Q4) prices looked 6% undervalued, and one year ago (2013 Q1) prices looked 10% undervalued (see note at end of post about the trend over time). This chart shows how far current prices are from a bubble:
bubble watch
Local Warning Signs Bubbling Up, Especially Along California Coast
Turning from the national view to the local scene, home prices are above their fundamental value in 19 of the 100 largest metros. Three of the five most overvalued housing markets are in southern California: Orange County, Los Angeles, and Riverside-San Bernardino; these three markets have also had sharp price increases over the past year. Looking across the whole state, prices in 8 of the 11 large California metros are overvalued now; the 3 exceptions are the undervalued inland metros of Fresno, Bakersfield, and Sacramento. trulia
Although national home prices rose significantly in the past two years, they’re still 5% undervalued compared with long-term fundamentals. Trulia’s Chief Economist Jed Kolko says home prices today look overvalued in 19 of the 100 largest metros, including 8 of the 11 large California metros.
Trulia’s Bubble Watch reveals whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer we are to a housing bubble – and the bigger the risk of a future price crash.
Recent price changes, by themselves, cannot tell us whether this is a housing bubble; neither can a simple comparison of nominal price levels today to where they were in the past. Asking prices in Las Vegas, for instance, are up almost 60% from their lowest point during the bust, and asking prices in Pittsburgh and Dallas are now above their 2006 highs. But none of those facts takes fundamentals into account, so none can tell us whether those local markets are in a housing bubble.
Bubble watching is as much art as it is science because there’s no definitive measure of fundamental value. To try to put numbers on it, we look at the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trends using multiple data sources, including the Trulia Price Monitor as a leading indicator of where home prices are heading. We then combine these various measures of fundamental value rather than relying on a single factor, because no one measure is perfect. Trulia’s first Bubble Watch report, from May 2013, explains our methodology in detail. Here’s what we found.
Bubbles Haven’t Broken the Surface Nationally
We estimate that home prices nationally are 5% undervalued in the first quarter of 2014 (2014 Q1), which means we’re not in a nationwide housing bubble. Remember that prices reached a high of 39% overvalued in 2006 Q1, then dropped to being 15% undervalued in 2011 Q4. One quarter ago (2013 Q4) prices looked 6% undervalued, and one year ago (2013 Q1) prices looked 10% undervalued (see note at end of post about the trend over time). This chart shows how far current prices are from a bubble:
bubble watch
Local Warning Signs Bubbling Up, Especially Along California Coast
Turning from the national view to the local scene, home prices are above their fundamental value in 19 of the 100 largest metros. Three of the five most overvalued housing markets are in southern California: Orange County, Los Angeles, and Riverside-San Bernardino; these three markets have also had sharp price increases over the past year. Looking across the whole state, prices in 8 of the 11 large California metros are overvalued now; the 3 exceptions are the undervalued inland metros of Fresno, Bakersfield, and Sacramento. trulia