While persistent price gains continue to dominate headlines, homes in a majority of major markets across the country remain slightly undervalued, quashing any concerns of a rising housing bubble, according to the latest data from Trulia [1].
Nationally, homes remain undervalued by 3 percent compared with long-term fundamentals, according to Trulia's Bubble Watch [2].
Market-level data reveals 76 of the 100 largest metros remain undervalued, and most of the overvalued markets are less than 10 percent overvalued.
"While the number of overvalued markets is rising, there remains little reason to worry about a new, widespread bubble forming," said Trulia chief economist Jed Kolko.
Just seven of the 100 largest metro markets are currently overvalued by more than 10 percent.
Furthermore, Trulia points out even today's most overvalued markets are nowhere near their bubble levels of overvaluation. For example, Orange County, California, the most overvalued market, is currently overvalued by 17 percent. This compares to 71 percent at the height of the bubble in 2006.
Honolulu and Los Angeles tie for second place on Trulia's list of overvalued markets. Homes in both metros are overvalued by 15 percent. However, in the first quarter of 2006, Honolulu homes were overvalued by 41 percent, and Los Angeles homes were overvalued by 79 percent, according to Trulia.
The trend reads similarly down the list of top 10 overvalued markets, with the exception of Austin, Texas. Prices in Austin are currently overvalued by 13 percent, compared to just 8 percent at the height of the bubble. Trulia explains, "that's because Austin (and Texas generally) avoided the worst of last decade's bubble and bust."
Overall, Trulia expects national home prices to rise to a neutral level—neither undervalued nor overvalued—by the end of this year or the start of next year. Slowing price gains at the national level [3] leave no concerns for a rising bubble, according to Trulia.
Currently, three of the top five undervalued markets are in Ohio, with Akron and Cleveland topping the list with homes currently undervalued by 21 percent.
Detroit, Michigan, and Dayton, Ohio, follow. Homes are undervalued by 19 percent and 16 percent, respectively, in these two markets. However, both markets are experiencing double-digit price gains, so Trulia does not expect them to linger on the most undervalued list for long.
Trulia determines whether a market is overvalued or undervalued by comparing home prices to price-to-income ratio, price-to-rent ratio, and long-term price trends.