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What Home Price Slowdown? Some Markets Buck the Trend

Jed Kolko, Chief Economist
November 6, 2014

Asking prices are rising more slowly now than a year ago. The price slowdown in especially sharp in California and the Southwest. Nevertheless, in 40 of the 100 largest markets, price gains have accelerated.

The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of housing price and rent trends nationally and locally. They adjust for the changing mix of listed homes and show what’s really happening to asking prices and rents. Asking prices lead sales prices by approximately two or more months. As a result, the Monitors reveal trends before other price indexes do. With that, here’s the scoop on where prices and rents are headed. 

Asking Prices Rose 6.4% Year-over-Year in October

Nationally, the month-over-month increase in asking home prices rose to 1.0% in October. Year-over-year, asking prices rose 6.4%, down from the 10.6% year-over-year increase in October 2013. Asking prices rose year-over-year in 91 of the 100 largest U.S. metros.

October 2014 Trulia Price Monitor Summary
% change in asking prices # of 100 largest metros with asking-price increases % change in asking prices, excluding foreclosures
Month-over-month,
seasonally adjusted
1.0% N/A 1.1%
Quarter-over-quarter,
seasonally adjusted
2.2% 90 2.2%
Year-over-year 6.4% 91 6.1%

Data from previous months are revised each month, so data being reported now for previous months might differ from previously reported data.

Price Gains Aren’t Slowing Everywhere

Nationally, year-over-year price gains have slowed from a year ago. In some markets, this price slowdown has been precipitous. In the most extreme case, Las Vegas prices rose 10.1% in October 2014 versus 31.9% in October 2013, a drop of 21.8 percentage points. Price gains have slowed by almost 20 percentage points in both Northern California (Sacramento, Oakland) and Southern California (Riverside-San Bernardino, San Diego) markets. Among the 10 markets with the largest price slowdowns, only one – Warren-Troy-Farmington Hills, next to Detroit – is outside California or the Southwest.

Nationally, price gains have slowed in 60 of the 100 largest metros, although prices are actually falling year-over-year in only nine metros.

Where Price Gains Have Slowed Most
# U.S. Metro Y-o-Y % asking price change, Oct 2014 Y-o-Y % asking price change, Oct 2013 Difference in price change, Oct 2014 vs Oct 2013, percentage points
1 Las Vegas, NV 10.1% 31.9% -21.8%
2 Sacramento, CA 10.0% 29.8% -19.9%
3 Riverside-San Bernardino, CA 9.1% 28.4% -19.3%
4 San Diego, CA 2.0% 21.0% -19.0%
5 Oakland, CA 11.3% 29.9% -18.6%
6 Bakersfield, CA 6.8% 24.6% -17.8%
7 Orange County, CA 5.1% 21.5% -16.4%
8 Los Angeles, CA 6.0% 22.0% -16.0%
9 Warren-Troy-Farmington Hills, MI 8.3% 22.6% -14.3%
10 Phoenix, AZ 4.2% 18.4% -14.2%
Note: among 100 largest metros. Differences in price gains were calculated before rounding. To download the list of asking home price changes for the largest metros: Excel or PDF

Where then are the 40 metros where prices have accelerated? They’re concentrated in the Midwest and the South. Prices gains have accelerated most in Dayton, Louisville, and Akron. However, the speed-ups aren’t as dramatic as the slowdowns. In no metro have prices accelerated by more than 10 percentage points. Dayton comes closest at 9.1 percentage points. By contrast, prices have slowed by more than 10 percentage points in 12 metros, including Orlando and Fort Lauderdale in addition to the 10 listed above.

Where Price Gains Have Accelerated Most
# U.S. Metro Y-o-Y % asking price change, Oct 2014 Y-o-Y % asking price change, Oct 2013 Difference in price change, Oct 2014 vs Oct 2013, percentage points
1 Dayton, OH 8.9% -0.2% 9.1%
2 Louisville, KY-IN 10.7% 2.1% 8.6%
3 Akron, OH 5.9% -0.7% 6.5%
4 Palm Bay-Melbourne-Titusville, FL 13.5% 7.9% 5.6%
5 Toledo, OH 9.2% 3.9% 5.3%
6 Gary, IN 8.3% 3.1% 5.1%
7 Tulsa, OK 7.8% 2.9% 4.9%
8 Pittsburgh, PA 5.7% 1.0% 4.7%
9 Virginia Beach-Norfolk, VA-NC 5.1% 0.7% 4.4%
10 Syracuse, NY 4.5% 0.4% 4.1%
Note: among 100 largest metros. Differences in price gains were calculated before rounding. To download the list of asking home price changes for the largest metros: Excel or PDF

Thus, the price deceleration is very pronounced in some markets, but by no means universal. In fact, the slowdown represents continued fallout from the housing crisis. Metros where the past decade’s housing crisis was especially severe (see note) experienced huge price rebounds last year, rates of increase that couldn’t be sustained. On average, these severely hit markets notched almost 20% price gains year-over-year in October 2013, compared with 7.9% in October 2014. Things that can’t last forever, don’t. And double-digit home-price increases are a prime example of something that can’t last forever. By contrast, markets that had a moderate housing bust experienced a gentler rebound in 2013 and slowdown in 2014. Markets that had only a mild housing bust have seen year-over-year price gains ease back just slightly, from 6.8% in October 2013 to 6.2% in October 2014.

Still, even with the sharp price slowdown in the severely hit markets, in October 2014 asking prices still rose more year-over-year in markets where the housing bust was severe than in moderate or mild markets.

HousingBustGraph

Rents Rising Fast in the Least Affordable Rental Markets

Nationally, rents rose 6.2% year-over-year in October. But in the markets where renters are stretched thinnest, rents are rising even faster. In Miami, Los Angeles, and New York, the median rent on a 2-bedroom unit equals more than half of the average monthly wage, and it’s nearly that much in Oakland and San Francisco. In all five of these least-affordable markets, rents rose 7.8% or more year-over-year. The rental affordability crisis is getting worse in the markets where it’s already bad – and that may hold until apartment construction brings more units onto the market.

 

Rent Trends in the 25 Largest Rental Markets
# U.S. Metro Y-o-Y % change in rents, Oct 2014 Median rent for 2-bedroom, Oct 2014 Median rent for 2-bedroom, as share of average local wage
1 Miami, FL 7.8% 2400 61%
2 Los Angeles, CA 8.3% 2550 56%
3 New York, NY-NJ 7.8% 3450 55%
4 Oakland, CA 13.3% 2550 49%
5 San Francisco, CA 14.4% 3600 49%
6 Riverside-San Bernardino, CA 6.1% 1550 46%
7 Orange County, CA 6.8% 2100 46%
8 San Diego, CA 5.3% 2000 44%
9 Boston, MA 4.2% 2300 40%
10 Chicago, IL 5.9% 1700 37%
11 Washington, DC-VA-MD-WV 4.0% 2050 35%
12 Baltimore, MD 8.4% 1550 35%
13 Denver, CO 14.3% 1550 33%
14 Philadelphia, PA 7.7% 1600 33%
15 Seattle, WA 8.5% 1750 32%
16 Tampa-St. Petersburg, FL 6.6% 1150 31%
17 Portland, OR-WA 5.9% 1300 31%
18 Dallas, TX 5.7% 1400 29%
19 Houston, TX 4.9% 1500 29%
20 Sacramento, CA 9.6% 1250 29%
21 Atlanta, GA 6.1% 1250 28%
22 Minneapolis-St. Paul, MN-WI 0.6% 1300 28%
23 Las Vegas, NV 5.8% 1000 28%
24 Phoenix, AZ 8.2% 1050 26%
25 St. Louis, MO-IL 5.9% 950 24%
Note: average local wage is from the Quarterly Census of Employment and Wages for full-year 2013.

 

The next Trulia Price Monitor and Trulia Rent Monitor will be released on Tuesday, December 9.

The severity of the housing crisis for each metro is based on peak-to-trough price declines in the Federal Housing Finance Agency’s home price index.

The Trulia Price Monitor and the Trulia Rent Monitor track asking home prices and rents on a monthly basis, adjusting for the changing composition of listed homes, including foreclosures provided by RealtyTrac. The Trulia Price Monitor also accounts for regular seasonal fluctuations in asking prices in order to reveal underlying price trends. The Monitors can detect price movements at least three months before the major sales-price indexes. Historical data are revised monthly. Thus, historical data presented in the current release are the best comparison with current data. Our FAQs provide the technical details.

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Condo Prices and Apartment Rents Outpacing Single-Family Home Costs

Jed Kolko, Chief Economist
October 9, 2014

Asking prices rose 7.3% year-over-year for condos versus 6.0% for single-family homes. Condo prices are up more than 15% in Miami, Denver, and West Palm Beach.

The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of housing price and rent trends nationally and locally. They adjust for the changing mix of listed homes and show what’s really happening to asking prices and rents. Asking prices lead sales prices by approximately two or more months. As a result, the Monitors reveal trends before other price indexes do. With that, here’s the scoop on where prices and rents are headed.

Prices Rose 0.8% Month-over-Month in September

Nationally, the month-over-month increase in asking home prices rose to 0.8% in September. Year-over-year, asking prices rose 6.4%, down from the 10.4% year-over-year increase in September 2013. Asking prices rose year-over-year in 92 of the 100 largest U.S. metros.

September 2014 Trulia Price Monitor Summary
% change in asking prices # of 100 largest metros with asking-price increases % change in asking prices, excluding foreclosures
Month-over-month,
seasonally adjusted
0.8% N/A 0.8%
Quarter-over-quarter,
seasonally adjusted
1.7% 80 2.0%
Year-over-year 6.4% 92 5.9%
Data from previous months are revised each month, so data being reported now for previous months might differ from previously reported data.

The South Leads in Price Gains

Five of the 10 U.S. metros with the largest year-over-year price increases were in the South, including Miami, Palm Bay-Melbourne-Titusville, West Palm Beach, Birmingham, and Atlanta.

These 10 metros include some markets where prices are speeding up and some where prices are slowing down. Prices are rising faster now than a year ago in Toledo, Birmingham, Miami, and several other metros. But in the two California metros where prices are rising the most – Ventura County and Oakland – as well as in Detroit and Atlanta, the past year’s price gains were actually slower than the previous year’s increases of 20% or more.

 Where Asking Prices Rose Most Year-over-Year, September 2014
# U.S. Metro Y-o-Y % asking price change, Sept 2014 Y-o-Y % asking price change, Sept 2013 Difference in price change, Sept 2014 vs Sept 2013
1 Miami, FL 14.0% 9.3% 4.7%
2 Palm Bay-Melbourne-Titusville, FL 13.1% 6.7% 6.4%
3 Toledo, OH 12.5% 1.6% 10.9%
4 Ventura County, CA 12.4% 20.2% -7.7%
5 Oakland, CA 11.9% 28.7% -16.8%
6 West Palm Beach, FL 11.7% 6.0% 5.8%
7 Birmingham, AL 11.5% 1.8% 9.7%
8 Detroit, MI 11.4% 20.0% -8.6%
9 Lake County-Kenosha County, IL-WI 11.3% 8.6% 2.7%
10 Atlanta, GA 11.1% 20.9% -9.7%
Note: among 100 largest metros. To download the list of asking home price changes for the largest metros: Excel or PDF

metro map sept 2014

Condo Prices Rising Faster than Single-Family Home Prices

Nationally, asking prices for condos – by which we mean all for-sale homes in multi-unit buildings — rose 7.3% year-over-year. That’s more than the 6.0% increase for single-family homes. Asking prices for condos rose more than 15% year-over-year in Miami, Denver, and West Palm Beach. Condo prices rose faster than single-family home prices in 18 of the nation’s 20 largest condo markets.

Although condo prices are outpacing single-family home prices, they are following similar patterns. Condo prices and single-family home prices are both rising faster in metros with stronger job growth and those that had a more severe housing bust in the past decade (a bounceback due to the “rebound effect”). In fact, metros with bigger condo price increases also tend to have bigger single-family home price increases.

Condo and Single-Family Home Prices in the 20 Largest Condo Markets
# U.S. Metro Y-o-Y % change in asking prices for condos, Sept 2014 Y-o-Y % change in asking prices for single-family homes, Sept 2014
1 Miami, FL 17.0% 11.7%
2 Denver, CO 15.5% 8.2%
3 West Palm Beach, FL 15.2% 9.5%
4 San Francisco, CA 12.7% 9.0%
5 Chicago, IL 10.9% 8.6%
6 Middlesex County, MA 10.4% 6.5%
7 Minneapolis-St. Paul, MN-WI 10.0% 10.1%
8 Boston, MA 9.6% 2.4%
9 Seattle, WA 9.4% 8.5%
10 Tampa-St. Petersburg, FL 9.1% 4.1%
11 Los Angeles, CA 8.7% 6.8%
12 Fort Lauderdale, FL 8.2% 5.2%
13 Philadelphia, PA 6.0% 3.3%
14 Honolulu, HI 5.7% 3.5%
15 New York, NY-NJ 5.0% 4.0%
16 Washington, DC-VA-MD-WV 4.9% 2.5%
17 Newark, NJ-PA 4.2% 1.0%
18 San Diego, CA 4.1% 1.8%
19 Long Island, NY 3.9% 2.6%
20 Providence, RI-MA 2.0% 3.0%
Note: condos refer to all for-sale units in multi-unit buildings. The 20 largest condo markets were determined based on Census data.

Rents Rising Faster for Apartments Than for Single-Family Homes

Nationally, rents rose 6.5% year-over-year in September. Apartment rents were up 6.9%, while single-family home rents gained 5.2%. Like the for-sale market, the rental market is tighter for multi-unit buildings than for single family homes. Census data show that the multi-unit vacancy rate has been falling steadily, but remains elevated for single-family homes. Despite the multi-unit construction boom, the cost of living in these buildings is rising faster than in single-family homes – both for renters and buyers. This is not necessarily a sign of a permanent shift toward city living. But it certainly reflects a reversal from the past decade’s bubble, when demand was strong for single-family homes in the suburbs and beyond.

                         Rent Trends in the 25 Largest Rental Markets
# U.S. Metro Y-o-Y % change in rents, Sept 2014 Median rent for 2-bedroom, Sept 2014
1 San Francisco, CA 15.5% 3600
2 Oakland, CA 14.2% 2600
3 Denver, CO 13.7% 1550
4 Sacramento, CA 13.3% 1250
5 Seattle, WA 9.4% 1800
6 Los Angeles, CA 9.0% 2550
7 Phoenix, AZ 8.8% 1050
8 Philadelphia, PA 8.7% 1600
9 Miami, FL 8.5% 2450
10 Baltimore, MD 8.3% 1600
11 New York, NY-NJ 7.8% 3500
12 Atlanta, GA 7.1% 1250
13 Chicago, IL 7.0% 1650
14 Riverside-San Bernardino, CA 6.3% 1550
15 Tampa-St. Petersburg, FL 6.2% 1150
16 St. Louis, MO-IL 6.2% 950
17 San Diego, CA 6.0% 2000
18 Orange County, CA 6.0% 2100
19 Las Vegas, NV 5.9% 1000
20 Dallas, TX 5.2% 1400
21 Houston, TX 5.1% 1500
22 Portland, OR-WA 4.7% 1300
23 Boston, MA 4.4% 2350
24 Washington, DC-VA-MD-WV 4.2% 2200
25 Minneapolis-St. Paul, MN-WI 0.6% 1300

The next Trulia Price Monitor and Trulia Rent Monitor will be released on Thursday, November 6.

How did we put this report together? The Trulia Price Monitor and the Trulia Rent Monitor track asking home prices and rents on a monthly basis, adjusting for the changing composition of listed homes, including foreclosures provided by RealtyTrac. The Trulia Price Monitor also accounts for regular seasonal fluctuations in asking prices in order to reveal underlying price trends. The Monitors can detect price movements at least three months before the major sales-price indexes do. Historical data are revised monthly. Thus, historical data presented in the current release are the best comparison with current data. Our FAQs provide the technical details.

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Housing Barometer: Recovery Continues, But Virtuous Cycle Not So Saintly

Jed Kolko, Chief Economist
October 1, 2014

Three out of five Housing Barometer measures are getting close to normal. But the two measures that hitch housing to the broader economy are still struggling, so the job market and housing market aren’t helping each other as they should.

How We Track This Uneven Recovery

Since February 2012, Trulia’s Housing Barometer has charted how quickly the housing market is returning to “normal” based on multiple indicators. Because the recovery is uneven, with some housing activities improving faster than others, our Barometer highlights five measures:

  1. Existing home sales, excluding distressed sales (National Association of Realtors, NAR)
  2. Home-price levels relative to fundamentals (Trulia Bubble Watch)
  3. Delinquency + foreclosure rate (Black Knight, formerly LPS)
  4. New construction starts (Census)
  5. The employment rate for 25-34 year-olds, a key age group for household formation and first-time homeownership (Bureau of Labor Statistics, BLS)

Home prices from our Bubble Watch is a quarterly report. The other four measures are reported monthly. To reduce volatility, we use three-month moving averages for these measures. For each indicator, we compare the latest available data to (1) its worst reading during the housing bust and (2) its pre-bubble “normal” level.

MD-235-Housing-Barometer_Q32014-v2

All Five Measures Improved Year-Over-Year

Four of the five Housing Barometer indicators made good progress over the past year and the fifth – non-distressed existing home sales – eked out a slight increase. But, despite improvement, the employment rate for young adults still hasn’t gotten even half of the way back to normal.

Housing Indicators: How Far Back to Normal?

Now One quarter ago One year ago
Existing home sales, excl. distressed 80% 64% 79%
Home price level 75% 66% 56%
Delinquency + foreclosure rate 74% 74% 56%
New construction starts 49% 49% 37%
Employment rate, 25-34 year-olds 37% 35% 25%
For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level
  • Existing home sales (excluding distressed) were 80% back to normal in August, up from 64% one quarter earlier, after stumbling from 79% one year ago. Distressed sales keep falling. Increasingly, foreclosures are concentrated in states with a foreclosure laws that result in a longer legal process. Existing sales are in better shape than new home sales, dominating the market even more than usual. The ratio of existing to new home sales was 10:1 in August, compared with a long-term normal ratio of 6:1..
  • Home prices continue to climb, though at a slower rate. Trulia’s Bubble Watch shows prices were 3.4% undervalued in 2014 Q3, compared with 13.5% undervalued at the worst of the housing bust. That means prices are three-fourths of the way back to their “normal” level at which they’re neither over- nor undervalued.
  • The delinquency + foreclosure rate was 74% back to normal in August, the same as one quarter ago and up significantly from 56% one year ago. With the share of mortgage borrowers with negative or near-negative equity dropping, the default rate should continue to go down.
  • New construction starts are 49% back to normal, the same as one quarter ago and up from 37% one year ago. Multi-unit starts continue to lead the construction recovery. Year-to-date multi-unit starts are up 23% year-over-year, versus just 3% for single-family starts. Even though single-family starts are far below normal levels, household formation looks too weak to support more single-family homebuilding.
  • Employment for young adults brings up the rear. August’s three-month moving average shows that 75.7% of adults age 25-34 are employed, which is just 37% of the way back to normal. Because young adults need jobs in order to move out of their parents’ homes, form their own households, and eventually become homeowners, the housing recovery depends on millennials finding work. Among 25-34 year-olds, just 12% who have jobs live with their parents. By contrast, 21% without jobs do.

The Housing Market and the Broader Economy Aren’t Helping Each Other

The two lagging Housing Barometer measures – construction and young-adult employment – connect the housing market to the job market. First, housing should help jobs: construction adds to employment not only in homebuilding but also in related industries like furniture manufacturing and home-improvement retailing. Second, jobs should help housing: young adults are more likely to rent or buy, rather than live with others, if they have jobs. In this recovery, young-adult employment and construction are weak – so the virtuous cycle of housing and jobs isn’t looking quite so virtuous.

That’s not to say that housing isn’t doing anything for the economy. Rising home prices make homeowners wealthier, and the more wealth people have, the more they spend. And the decline in defaults and foreclosures have helped stabilize the financial system and hard-hit neighborhoods. As we’ve seen, home prices right themselves, as undervalued homes attract investors and other buyers, pushing prices back up. In turn, higher prices make defaults less likely.

But as the housing recovery continues, it depends less on the “rebound effect” – this tendency of the housing prices to right themselves – and more on such fundamentals as jobs, income growth, and household formation. These have been slow to improve in this recovery. In particular, the Housing Barometer shows that young-adult employment lags. What’s more, new Census data showed that median income has stagnated and household formation is far below normal levels. In this recovery, jobs and housing can’t get what they need from each other.

 

NOTE: Trulia’s Housing Barometer tracks five measures: existing home sales excluding distressed (NAR), home prices (Trulia Bubble Watch), delinquency + foreclosure rate (Black Knight), new home starts (Census), and the employment rate for 25-34 year-olds (BLS). Also, our estimate of the “normal” share of sales that are distressed is 5%; Black Knight reports that the share was in the 3-5% range during the bubble. For each measure, we compare the latest available data to (1) the worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level. We use a three-month average to smooth volatility for the four indicators that are reported monthly (all but home prices). The latest data are from August for the employment rate, existing home sales, new construction starts, and the delinquency + foreclosure rate; and Q3 for home prices.

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Bubble Watch: Home Prices 3% Undervalued, With Few Metros Bubbling Up

Jed Kolko, Chief Economist
October 1, 2014

Home prices now look 3% undervalued measured by long-term fundamentals. Just 7 of the 100 largest metros are more than 10% overvalued.

(UPDATE 10/15/14: We’ve created an FAQ that answers frequently-asked questions about Trulia’s Bubble Watch report. It’s available here.)

Trulia’s Bubble Watch shows 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 price crash. Sharply rising prices aren’t necessarily a sign of a bubble. By definition, a bubble develops when prices look high relative to fundamentals.

Bubble watching is as much an art as a 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. We use multiple data sources, including the Trulia Price Monitor, as leading indicators of where home prices are heading. We 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 this quarter. (This report contains larger-than-usual revisions of previous Bubble Watch estimates. See note.)

Home Prices are 3% Undervalued Nationally

We estimate that home prices nationally are 3% undervalued in the third quarter of 2014 (2014 Q3). In 2006 Q1, during the past decade’s housing bubble, home prices soared to 34% overvalued before dropping to 13% undervalued in 2012 Q1. One quarter ago (2014 Q2), prices looked 5% undervalued; one year ago (2013 Q3), prices looked 6% undervalued. This chart shows how far current prices are from a bubble:

Trulia_BubbleWatch_Infographic_Q32014

Texas and California Metros Look Most Overvalued

The most overvalued market is now Austin, at 19%, followed by the California metros of Los Angeles, Orange County, San Francisco, and Riverside-San Bernardino. The California metros on the top-10 list were all significantly overvalued during the past bubble, ranging from 46% overvalued in San Francisco to a dizzying 87% in Riverside-San Bernardino. By contrast, Austin and Houston are the only metros out of the 100 largest that look more overvalued today than in 2006. Texas markets avoided the worst of the housing bubble during the past decade. Recently, they’ve had double-digit home-price increases.

Top 10 Metros Where Home Prices Are Most Overvalued
# U.S. Metro Home prices relative to fundamentals, 2014 Q3 Home prices relative to fundamentals, 2006 Q1 Year-over-year change in asking prices, Aug 2014
1 Austin, TX +19% +2% 11.9%
2 Los Angeles, CA +15% +73% 8.9%
3 Orange County, CA +15% +66% 6.0%
4 San Francisco, CA +12% +46% 11.2%
5 Riverside-San Bernardino, CA +11% +87% 13.8%
6 Honolulu, HI +10% +36% 6.7%
7 San Jose, CA +10% +53% 10.4%
8 Houston, TX +8% +1% 10.4%
9 Denver, CO +7% +17% 9.4%
10 Oakland, CA +7% +67% 12.4%
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.

Almost all of the most undervalued metros today are in the Midwest and New England, led by Dayton and Cleveland. One year ago, Las Vegas and two Florida metros, Lakeland-Winter Haven and Palm Bay-Melbourne-Titusville, were on the most-undervalued list. Since then, price gains have lifted them off this list. In the past year, price gains in the undervalued Midwestern markets like Detroit have outpaced price gains in the undervalued New England markets like New Haven.

Top 10 Metros Where Home Prices Are Most Undervalued
# U.S. Metro Home prices relative to fundamentals, 2014 Q2 Home prices relative to fundamentals, 2006 Q1 Year-over-year change in asking prices, May 2014
1 Dayton, OH -21% 8% 8.8%
2 Cleveland, OH -19% 13% 5.9%
3 Detroit, MI -18% 33% 11.9%
4 Akron, OH -18% 13% 8.9%
5 Lake County-Kenosha County, IL-WI -17% 24% 12.2%
6 Toledo, OH -17% 17% 9.6%
7 New Haven, CT -16% 31% -0.9%
8 Camden, NJ -15% 31% 1.8%
9 Worcester, MA -15% 38% 3.5%
10 Fairfield County, CT -14% 30% 0.4%

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.

Are We Headed Toward The Next Bubble?

One test of whether it’s time to sound the bubble alarm is whether prices are rising faster in markets that are already overvalued. Price gains in overvalued markets are a sign that we’re headed for danger, while price gains in undervalued markets are probably just a sign of getting back toward normal.

To measure this, we compare the most recent year-over-year asking-price change from the Trulia Price Monitor with our Bubble Watch measure from 2013 Q3, one year ago. That’s because what matters is whether overvalued markets subsequently see faster price gains (remember that current Bubble Watch values, by design, incorporate recent price trends).

The scatterplot below shows the relationship. Hard to see a pattern, right? Actually, there’s a negative relationship, but it’s small (correlation = -0.07) and not statistically significant. At least we can say that overvalued markets are not systematically seeing larger price increases, though some individual overvalued markets like Austin and Riverside-San Bernardino did have big price jumps.

Trulia_BubbleWatch_Scatterplot_Q32014

Another measure of bubble risk is how many markets are more than 10% overvalued. As of 2014 Q3, only seven of the top 100 metros exceeded this level, as shown in the table above. That’s the highest number since 2009 Q1, when prices were plummeting and the past bubble had mostly deflated. The last time that the number of 10%+ overvalued markets was at least seven and rising was 2000 Q2 – early in the formation of that bubble.

Trulia_BubbleWatch_OvervaluedMetros_Q32014

All this means that bubbles should not be our top housing worry today. Our latest Housing Barometer shows that weak construction and subpar young-adult employment are the recovery’s big red flags. By contrast, prices are slowing to a sustainable pace and staying within striking distance of normal.

 

Note: each quarter’s Bubble Watch includes revisions to previous estimates because the underlying data are often revised or updated. To compare the national or metro trend over time, look at the current report’s historical numbers, not previously reported numbers. This quarter’s Bubble Watch contains larger-than-usual revisions because a key input data series – the Case-Shiller national index – recently had significant revisions that resulted in less extreme price swings during the boom and bust.

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