Home Prices Still Undervalued; What Cities are the Top Two?

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By: Jed Kolko

Home prices now look 3% undervalued compared with long-term fundamentals. Of the 100 largest metros, 76 are undervalued while just 7 are more than 10% overvalued. 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. Sharply rising prices aren’t necessarily a sign of a bubble, a bubble is when prices look high relative to fundamentals. Bubble watching is as much an art as it is 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 using multiple data sources. We then combine these various measures of fundamental value rather than relying on a single factor, because no one measure is perfect.

At this pace, home prices nationally should be in line with long-term fundamentals (i.e. neither over- or undervalued) by the last quarter of 2014 or the first quarter of 2015. The good news for bubblephobes is that price gains are now slowing down while prices still look (slightly) undervalued. We would be at greater risk of heading toward a bubble if price gains were still accelerating, but they’re not. Eight of the 10 most overvalued housing markets are in California, with Orange County, Los Angeles, and Riverside-San Bernardino in the top four. However, they are not seeing the return of last decade’s bubble. These California markets are much less overvalued than they were at the height of the bubble. Orange County, today’s frothiest market, is just 17% overvalued now versus being 71% overvalued in 2006 Q1.

Only in Akron and Cleveland are prices undervalued by more than 20%. Furthermore, in those two markets, home prices are rising below the national average of 8.0%. However,in several of the most undervalued markets, including Detroit and Chicago, prices are now rising year-over-year in the double digits. Even though Akron and Celveland are top two right now, those markets are unlikely to stay on the most-undervalued list for many more quarters.

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 Akron, OH -21% +18% 4.7%
2 Cleveland, OH -21% +18% 6.3%
3 Detroit, MI -19% +38% 15.2%
4 Dayton, OH -16% +13% 12.1%
5 Worcester, MA -15% +43% 4.4%
6 Memphis, TN-MS-AR -14% +11% 3.2%
7 Toledo, OH -14% +22% 10.0%
8 Chicago, IL -14% +36% 13.5%
9 LakelandWinter Haven, FL -14% +54% 3.8%
10 Providence, RI-MA -14% +52% 2.9%

Three-Fourths of Markets Still Undervalued Of the 100 largest metros, home prices in 76 of them look undervalued. The number of overvalued markets, 24  has climbed up from 19 last quarter (2014 Q1) and just 5 last year (2013 Q2). Most of the 24 overvalued markets are overvalued just a bit, with 17 overvalued by less than 10% and 7 overvalued by more than 10%. While the number of overvalued markets is rising, there remains little reason to worry about a new, widespread bubble forming. The last two years of strong price gains have been from a relatively low level and still haven’t pushed home prices nationally above our best guess of their long-term fundamental value.

 

 

For more Articles like this please visit www.trulia.com. Reprinted from www.trulia.com with presmission from Trulia.com

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