There’s No Housing Bubble, but Places Like California Starting to Look Frothy by Elaine360

Have the nation’s rapidly rising home prices thrown us back into a housing bubble? Fortunately for the economy — if unfortunately for buyers who’ve been frustrated by the rebound in home prices – the answer is no. But some of coastal markets are starting to look frothy. California: We’re looking at you (you too, Florida).
housing-forecastA recent Trulia report gauges whether home prices are over or undervalued, and where. Nationally, home prices are still undervalued by about 5%, Trulia estimates. Home prices aren’t as cheap as they were, and interest rates aren’t as low, but both are still low by historical standards. So U.S. housing markets are for the most part affordable — even for middle class buyers.

At the same time, the Homes-Are-Crazy-Affordable era has come to a close. When home prices hit their bottom at the end of 2011, national home prices were about 15% undervalued. That’s no longer the case, and in some select markets rising prices are coming unchained from their long-term fundamentals.

California is one. There, gains in some of the hottest markets are looking unsustainable. The Orange County metro area is about 16% overvalued, Trulia says. Nearby Los Angeles is 13% overvalued. Six of the nation’s ten most overvalued cities were in California, according to Trulia.

What’s in a bubble? Trulia tries to gauge an area’s “fundamental value” through a combination of historical prices, local wages and income streams like rent. So rising prices, even rapidly rising prices, don’t necessarily mean bubble. Things get sketchy when prices rise fast enough to become disconnected from local incomes and rental rates.

“The key is that each metro has its own normal. And bubble is not the same as lack of affordability. Detroit was affordable even at the height of the bubble, while San Francisco was out of reach to many even at the worst of the bust,” notes Jed Kolko, Trulia’s chief economist.

Overall, 19 of the nation’s 100 largest metros were overvalued in the first quarter of 2014. That was the highest number since the fourth quarter of 2009, which was when the nation was still in recession and home prices still in freefall.

That’s not even close to where the market was during its pre-recession peaks. At the height of the bubble home prices were 39% overvalued nationally. Every single market was overvalued a little bit and 91 by more than 10%. Today, four are overvalued by more than 10%.

But those are four worth watching.

DRE #00598428
Senior Director, Coldwell Banker New Homes Division
With over 200 condominium, townhome and loft projects successfully marketed

“Fewer properties for sale with such remarkably low interest rates make it a great time to sell but a more difficult time to buy”