With home prices rising nationally as quickly as they did during the peak bubble years of 2005-2006, the next housing bubble might be around the corner. To be certain, Trulia today introduced a new data source that shows just how to spot a bubble.
Trulia’s Bubble Watch incorporates the company’s Price Monitor index as well as other data sources to track whether home prices are in or nearing “bubble territory.”
“Even with recent sharp home price increases, prices are still low relative to fundamentals and are far below bubble levels,” writes Trulia’s Chief Economis Jed Kolko.
Trulia defines “fundamental value” by comparing prices today with historical prices, incomes and rents to asses whether home prices in certain areas are undervalued or overvalued.
As it turns out, home prices are 7% undervalued nationally and regionally in 91 of the 100 largest metros, according to Trulia’s Bubble Watch.
During the last decade’s bubble, prices were as high as 39% overvalued in the first quarter of 2006, then during the bust fell to 15% undervalued in the fourth quarter of 2011.
Therefore, even with home price increases, writes Kolko, home prices nationally remain undervalued and much lower than in the last bubble.
“That’s why today’s price gains are actually still a rebound, not a bubble,” writes Kolko.
Other indicators such as tight mortgage lending and construction activity also confirm that the housing market is not yet forming a new bubble.
Because housing bubbles are difficult to predict, only materializing once they have burst, the nation is safe from the next housing bubble for now, since home prices are unlikely to keep rising as fast as they are today, says Kolko.
“Whether you’re buying a home, selling a home, or setting housing policy, remember that the next housing bubble is probably just a matter of time,” he writes. “But, as Trulia’s Bubble Watch shows, that time is not now.”
Written by Jason Oliva