Any fears of an impending housing bubble can be laid to rest as home prices are 5% undervalued in the third quarter of 2013, according to Trulia’s recent Bubble Watch report.
Trulia considers the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trend when compiling its Bubble Watch report, which uses data from multiple sources.
National home prices remain undervalued in the third quarter, compared to prices that soared as much as 39% over value in the first quarter of 2006, when the last housing bubble occurred.
Following the housing market crash, home prices fell to 15% undervalued in the fourth quarter of 2011 before creeping up to 7% undervalued in the second quarter of 2013. Despite prices being less undervalued in the following quarter, Trulia says they’re far from a bubble.
“Nationally, home prices have started to slow down even though they haven’t yet become overvalued,” says Trulia. “The Trulia Price Monitor showed asking prices declined in July 2013, month-over-month, and are decelerating on a quarter-over-quarter basis. This price slowdown boosts the chances of avoiding a housing bubble in the next few years.”
Relative to long-term fundamentals, says Trulia, prices remain undervalued despite rising 11% year-over-year.
Taking a closer look, home prices are below their fundamental value in 81 of the country’s 100 largest metros. Even looking at the 19 overvalued metros, most are only slightly above value. Only two—Orange County (12%) and Los Angeles (10%) are considered overvalued by double digits.
The other most overvalued markets include Austin, Texas (9%), Oakland, Calif. (7%), and Honolulu, Hawaii (7%).
While California and Texas dominate the list of overvalued metros, most undervalued areas are located n Florida and Ohio, led by Palm Bay-Melbourne-Titusville, Fla., with home prices relative to fundamentals down 20% in the third quarter of 2013.
Cleveland and Akron (both down 19%), Lakeland-Winter Haven, Fla. (down 18%), and Toledo, Ohio (down 17%) round out the top five metros with home prices down year-over-year.
“The three factors that are contributing to the price slowdown—expanding inventory, rising mortgage rates, and fading investor interest—aren’t going away any time soon, which should put a cap on how much prices rise,” Trulia concludes. “Even though prices look less undervalued than last quarter or last year, the price slowdown means our chances of avoiding the next housing bubble just got better.”
Written by Alyssa Gerace
