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Bubble Watch: Local Worries, National Calm

Although national home prices rose significantly in the past two years, they’re still 5% undervalued compared with long-term fundamentals. 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:

bubblewatch

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.

Top 10 Metros Where Home Prices Are Most Overvalued

# U.S. Metro

Home prices relative to fundamentals, 2014 Q1

Year-over-year change in asking prices, February 2014

1 Orange County, CA

+16%

16.9%

2 Los Angeles, CA

+13%

18.9%

3 Honolulu, HI

+13%

12.1%

4 Austin, TX

+11%

11.3%

5 Riverside-San Bernardino, CA

+10%

24.1%

6 San Jose, CA

+8%

14.5%

7 San Francisco, CA

+7%

16.5%

8 Miami, FL

+6%

12.4%

9 Fort Lauderdale, FL

+6%

18.0%

10 Ventura County, CA

+6%

17.1%

Note: positive numbers indicate overvalued prices; negative numbers indicate undervalued, among the 100 largest metros. Click here to see the price valuation for all 100 metros: Excel or PDF.

Prices are most undervalued today in several Midwest and Connecticut markets. Eight of the 10 most undervalued housing markets had single-digit price gains or slight price drops in the past year, though Detroit and Chicago had double-digit price gains. … continue reading

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Bubble Watch: Home Prices Simmering, Not Bubbling

Despite rapidly rising over the past year, home prices are 4% undervalued in the fourth quarter of 2013. Although prices look more than 10% overvalued in Orange County and Los Angeles, prices look undervalued in 83 of the 100 largest metros.

Jed Kolko, Chief Economist
November 13, 2013

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.

Trulia’s first Bubble Watch report, from May 2013, explains our methodology in detail. 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. Here’s what we found.

Prices Far From Bubble Territory
We estimate that home prices nationally are 4% undervalued in the fourth quarter of 2013 (2013 Q4), which means we’re nowhere near another housing bubble. To put this in perspective, prices were as much as 39% overvalued in 2006 Q1, at the height of last decade’s bubble, then dropped to being 15% undervalued in 2011 Q4. One quarter ago (2013 Q3) prices looked 6% undervalued; one year ago (2012 Q4) prices looked 13% undervalued (see note at end of post). This chart shows how far current prices are from a bubble:

Trulia_BubbleWatch_Graphic_Nov2013-01

Bubbling Local Markets: Orange County and Los Angeles
At the metro level, home prices are above their fundamental value in 17 of the 100 largest metros. Most of these overvalued metros are only slightly so: of the 17 overvalued metros, just two – Orange County and Los Angeles – look at least 10% overvalued. (Austin rounds up to 10% but is actually slightly below.) Several California metros also stand out for having both overvalued prices AND sharp price increases, including Orange County, Los Angeles, Oakland, and Riverside-San Bernardino.

Top 10 Metros Where Home Prices are Most Overvalued

# U.S. Metro

Home prices relative to fundamentals, 2013 Q4

Year-over-year change in asking prices, October 2013

1 Orange County, CA

+13%

23.4%

2 Los Angeles, CA

+12%

22.5%

3 Austin, TX

+10%

11.7%

4 Oakland, CA

+7%

29.6%

5 Riverside-San Bernardino, CA

+7%

26.9%

6 Houston, TX

+6%

13.9%

7 San Jose, CA

+6%

19.1%

8 San Francisco, CA

+5%

15.6%

9 Honolulu, HI

+5%

2.9%

10 San Antonio, TX

+4%

11.1%

Note: positive numbers indicate overvalued prices; negative numbers indicate undervalued, among the 100 largest metros. Click here to see the price valuation for all 100 metros: Excel or PDF.

… continue reading

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Bubble Watch: Home Prices 5% Undervalued, Far Cry From Bubble

Only two of the 100 largest metros – Orange County and Los Angeles – have prices that are more than 10% overvalued, while more than four out of five metros still look undervalued, despite the price recovery.

Jed Kolko, Chief Economist
August 14, 2013

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 coming price crash.

Our first Bubble Watch report, from May 2013, explains our methodology in detail. We look at the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trend, 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. Here’s what we found.

Prices are Far From Bubble Levels
We estimate that national home prices are 5% undervalued in the third quarter of 2013 (2013 Q3). During last decade’s housing bubble, prices were as high as 39% overvalued in 2006 Q1, then after the crash fell to 15% undervalued in 2011 Q4. One quarter ago (2013 Q2) prices looked 7% undervalued; one year ago (2012 Q3) prices looked 14% undervalued. This chart shows how far prices are from a bubble:

Trulia_BubbleWatch_Graphic_Aug2013

In the last year, prices have risen faster than rents or income, making them less undervalued per our Bubble Watch measure. But even with prices rising 11% year-over-year according to the Trulia Price Monitor, prices remain 5% undervalued relative to long-term fundamentals.

… continue reading

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Rebound, Not Bubble: Home Prices Still Undervalued

Although home price gains rival those of the last decade’s bubble, home prices today look undervalued by 7%. Prices are overvalued only in a few California and Texas metros.

Home prices today are rising nearly as fast as they did during the peak bubble years of 2005-2006. Since that bubble helped push us into the Great Recession, we should all be on high alert for the next housing bubble. To track whether home prices are in or nearing bubble territory, today we introduce Trulia’s Bubble Watch, which is based on the most recent price data from the Trulia Price Monitor and other data sources.

So are we in bubble territory? No. Bubble-phobes can rest easy. Even with recent sharp home price increases, prices are still low relative to fundamentals and are far below bubble levels.

Back to Basics: How to Spot a Bubble
To see a bubble, you first need to know what you’re looking for. A bubble in home prices (or in the price of any asset – like stocks or even tulips) is when prices soar above their fundamental value. Fundamental value is based on supply, demand, and realistic expectations about the future. We all learned in Economics 101 that prices move back toward an equilibrium determined by fundamentals of supply and demand. In a bubble, however, rising prices encourage speculation and fuel further demand – up until when the bubble suddenly bursts and people rush to sell, which causes prices to accelerate downward, sometimes well below their fundamental value. Bubbles are notoriously difficult to predict and hard to confirm until after they’ve burst: it’s impossible to be sure whether price gains are justified by fundamentals until, if and when, a bubble bursts. San Francisco home prices, for instance, are the highest in the country; is that “irrational exuberance” by speculative homebuyers, or are those prices justified by strong job growth, high incomes, great weather, and constraints on the local housing supply?

To answer that question, we assess whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. Incomes determine how much people can pay for housing, and price increases aren’t sustainable if they push prices too high relative to incomes. Rents reflect how much people value housing even if they won’t benefit from price appreciation (as renters don’t, but owners do); the price-to-rent ratio is like the price-earnings (P/E) ratio for stocks. Using data from multiple sources (see footnote), we create several measures of fundamental value and combine them in order to calculate how overvalued or undervalued home prices are relative to fundamentals.

Home Prices are Undervalued 7% Nationally and Regionally in 91 of the 100 Largest Metros
We estimate that national home prices are 7% undervalued in the second quarter of 2013 (2013 Q2). During last decade’s bubble, prices were as high as 39% overvalued in 2006 Q1, then during the bust, fell to 15% undervalued in 2011 Q4. Therefore, even with the recent price increases, home prices nationally remain undervalued relative to fundamentals and much lower than in the last bubble. That’s why today’s price gains are actually still a rebound, not a bubble. This chart shows how far prices are from bubble territory:

TruilaBubbleWatch_LineGraph_2013Q2

… continue reading

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