While national home prices don’t appear to be entering bubble territory any time soon, certain local housing markets on the other hand are beginning to show signs of bubbling up, according to Trulia’s latest Bubble Watch.
Trulia’s Bubble Watch determines 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 their fundamental values, the closer the market is to a housing bubble.
Nationally, home prices are 5% undervalued in the first quarter of 2014, calming fears that the country is approaching another housing bubble, according to Trulia’s estimations.
Prior to the housing bubble, national home prices reached a high of 39% overvalued in the first quarter of 2006. They reached their trough during the fourth quarter of 2011, when they were 15% undervalued.
Last year, Trulia notes that home prices on a national scale were 10% undervalued, and 6% undervalued last quarter.
But while the potential of a housing bubble may not have broken the surface nationally, some local markets have been showing warning signs of bubbling up—particularly California, which is home to three of the five most overvalued housing markets in the country, according to Trulia’s findings.
Orange County, Los Angeles and Riverside-San Bernardino have seen home prices that are, on average, higher than their fundamental values by as much as 16%, 13% and 10%, respectively.
Additionally, each of these three markets have also seen double-digit growth in asking prices in February 2014, increasing year-over-year by 16.9%, 18.9% and 24.1%.
Although the number of housing markets where prices look overvalued is rising, Trulia assures that the number of overvalued markets is still low compared with the longer-term historical view.
In the first quarter of 2014, prices were overvalued in 19 of the 100 largest metros. At the height of the bubble, all 100 metros were overvalued, with 91% overvalued by more than 10%.
Despite the few, overvalued markets, the nation is still safe from another housing bubble and subsequent market crash, especially as a slowdown in price gains make it less likely that the country is headed towards another bubble, says Trulia’s Chief Economist Jed Kolko.
“Trulia’s Bubble Watch shows that national price levels today are roughly in line with fundamentals, like incomes, rents, and historical price paths,” Kolko says. “Even though recent double-digit price gains look unsustainable, current national price levels are not cause for alarm.”
Written by Jason Oliva