Rebound, Not Bubble: Home Prices Still Undervalued
Although home price gains rival those of the last decade’s bubble, home prices today look undervalued by 7%. Prices are overvalued only in a few California and Texas metros.
Home prices today are rising nearly as fast as they did during the peak bubble years of 2005-2006. Since that bubble helped push us into the Great Recession, we should all be on high alert for the next housing bubble. To track whether home prices are in or nearing bubble territory, today we introduce Trulia’s Bubble Watch, which is based on the most recent price data from the Trulia Price Monitor and other data sources.
So are we in bubble territory? No. Bubble-phobes can rest easy. Even with recent sharp home price increases, prices are still low relative to fundamentals and are far below bubble levels.
Back to Basics: How to Spot a Bubble
To see a bubble, you first need to know what you’re looking for. A bubble in home prices (or in the price of any asset – like stocks or even tulips) is when prices soar above their fundamental value. Fundamental value is based on supply, demand, and realistic expectations about the future. We all learned in Economics 101 that prices move back toward an equilibrium determined by fundamentals of supply and demand. In a bubble, however, rising prices encourage speculation and fuel further demand – up until when the bubble suddenly bursts and people rush to sell, which causes prices to accelerate downward, sometimes well below their fundamental value. Bubbles are notoriously difficult to predict and hard to confirm until after they’ve burst: it’s impossible to be sure whether price gains are justified by fundamentals until, if and when, a bubble bursts. San Francisco home prices, for instance, are the highest in the country; is that “irrational exuberance” by speculative homebuyers, or are those prices justified by strong job growth, high incomes, great weather, and constraints on the local housing supply?
To answer that question, we assess whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. Incomes determine how much people can pay for housing, and price increases aren’t sustainable if they push prices too high relative to incomes. Rents reflect how much people value housing even if they won’t benefit from price appreciation (as renters don’t, but owners do); the price-to-rent ratio is like the price-earnings (P/E) ratio for stocks. Using data from multiple sources (see footnote), we create several measures of fundamental value and combine them in order to calculate how overvalued or undervalued home prices are relative to fundamentals.
Home Prices are Undervalued 7% Nationally and Regionally in 91 of the 100 Largest Metros
We estimate that national home prices are 7% undervalued in the second quarter of 2013 (2013 Q2). During last decade’s bubble, prices were as high as 39% overvalued in 2006 Q1, then during the bust, fell to 15% undervalued in 2011 Q4. Therefore, even with the recent price increases, home prices nationally remain undervalued relative to fundamentals and much lower than in the last bubble. That’s why today’s price gains are actually still a rebound, not a bubble. This chart shows how far prices are from bubble territory:
Not Just Investors: Local Job Growth Also Supporting Home Price Gains
Asking home prices rose nationally 8.3% year-over-year. Nine of the 10 markets with the biggest price gains also had job growth above the national average.
The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of how asking prices and rents are trending nationally and locally. They adjust for the changing mix of listed homes and therefore show what’s really happening to asking prices and rents. Because asking prices lead sales prices by approximately two or more months, the Monitors reveal trends before other price indexes do. With that, here’s the scoop on where prices and rents are headed.
Prices Up 8.3% Year-over-Year, Rising in 95 of 100 Largest Metros
In April, asking home prices rose 1.3% month-over-month, seasonally adjusted. Quarter-over-quarter, prices are up 4.3%, seasonally adjusted. Year-over-year, prices are up 8.3% nationally and are higher than one year ago in 95 of the 100 largest metros.
|
April 2013 Trulia Price Monitor Summary |
|||
|
% change in asking prices |
# of 100 largest metros with asking-price increases |
% change in asking prices, excluding foreclosures |
|
| Month-over-month, seasonally adjusted |
1.3% |
Not reported |
1.7% |
| Quarter-over-quarter, seasonally adjusted |
4.3% |
96 |
4.6% |
| Year-over-year |
8.3% |
95 |
9.3% |
Buying a Piece of Local History: American Homes Through the Decades
New homes dominate the market across the Sunbelt and typically cost more – and have more space -- than older homes. But in most markets, you can also find older homes with historical features and distinct architectural styles. In a few metros, like Charleston, SC, and Washington D.C., the oldest homes cost the most.
Would you rather have a newly-built home or a piece of local history? Across America today, you can find homes for sale that were built as long ago as the 19th century or as recently as yesterday. There’s no mistaking a 1920s Dutch colonial, a 1970s A-frame, or a 2000s home tricked out with the latest spa features. To guide you through the decades, we looked at listings on Trulia from the past two years and found descriptive phrases that are most characteristic of homes built in each decade. But just because you want a 19th century Victorian or a 1950s brick rambler doesn’t mean you can find one: each region of the country had its own construction heyday, and the age of homes for sale today in a local market reflect when in history that location had population growth and new home construction. So buckle up … it’s time to take a trip back in the time machine.
The Way Homes Used to Be: Homes Before 1940
San Francisco Victorians, New York pre-war buildings: old homes are part of local history in much of the country. But across the Sunbelt, population growth has been more recent, so truly old homes are rare. This interactive map shows the percent of on-market homes (as of the last week in March 2013) built in each decade in the largest major metros.
The oldest homes for sale – those built before 1900 – are concentrated in New England and upstate New York. More than 5% of homes currently listed in the Massachusetts metros of Peabody, Boston, Middlesex County, Springfield, and Worcester were built before 1900, along with the upstate New York metros of Syracuse, Albany, and Rochester. Allentown, PA, and Providence, RI, round out the 10 metros with the largest share of old homes for sale.
| # | Metro | Share of on-market homes built before 1900 | Share of on-market homes built before 1940 |
| 1 | Peabody, MA |
11.2% |
32.3% |
| 2 | Boston, MA |
9.5% |
29.6% |
| 3 | Syracuse, NY |
8.7% |
26.0% |
| 4 | Springfield, MA |
7.3% |
25.7% |
| 5 | Middlesex County, MA |
6.9% |
26.4% |
| 6 | Allentown, PA-NJ |
6.8% |
27.8% |
| 7 | Worcester, MA |
6.7% |
20.9% |
| 8 | Albany, NY |
6.6% |
20.7% |
| 9 | Providence, RI-MA |
6.6% |
22.8% |
| 10 | Rochester, NY |
6.5% |
27.5% |
You’ll find a large share of homes built in the 1900s in San Francisco (6.4%) – especially just after the 1906 earthquake – while homes from the 1920s are easiest to find in New York (12.3% of on-market homes there were built in the 1920s), Los Angeles (9.7%), and several Ohio markets including Toledo, Akron, Dayton, and Cleveland. At the other extreme, there are essentially no homes from the 19th century across much of the South and the West. In fact, fewer than 1% of on-market homes were built before 1940 in Las Vegas, Fort Lauderdale, Phoenix, and other Sunbelt metros.
What’s special about old homes? Listings for homes built before 1900 are far more likely to mention exposed brick, pocket doors (which open by sliding into a “pocket” in the nearby wall rather than swinging open), carriage houses, and grand staircases than homes built in more recent decades. Homes from the 1900s mention tin ceilings, fir floors, and chimneys, while homes from the 1910s often call out kitchen and bathroom features like built-in buffets, claw-foot tubs, and china cabinets. In the 1920s, wood features were popular: properties from that decade call out gumwood trim and herringbone floors. Also in the 1920s, European styles were in vogue: listings mention original French doors, French windows, and Spanish styles. Homes from the 1930s are more likely to mention slate roof and glass door knobs, and curves were in fashion too, with coved ceilings and arched doorways. These popular listing words reveal the evolution of American architecture and building materials – you can see the five phrases that capture the character of each decade in our interactive map based on Trulia’s analysis of for-sale listings.
Housing Recovery Marches On
Trulia’s Housing Barometer shows market is 56% back to normal in March, up from 43% six months ago
Each month, Trulia’s Housing Barometer charts how quickly the housing market is moving back to “normal.” We summarize three key housing market indicators: construction starts (Census), existing home sales (NAR), and the delinquency-plus-foreclosure rate (LPS First Look). For each indicator, we compare this month’s data to (1) how bad the numbers got at their worst and (2) their pre-bubble “normal” levels.
In March 2013, construction starts and the delinquency + foreclosure rate improved:
- Construction starts rocketed to a new post-bubble high. Starts were at a 1,036,000 seasonally adjusted annualized rate – up 7% month-over-month and 47% year-over-year – which is the highest level since June 2008. In March, 38% of new starts were in multi-unit buildings, compared with the typical level of 20%. Construction starts are now 55% of the way back to the normal level of 1.5 million from their low during the bust.
- Existing home sales went down a bit. Sales fell 0.6% in March to a seasonally adjusted annualized rate of 4.92 million homes. That’s a 10% increase over one year ago. Excluding distressed sales, conventional home sales were up 23% year-over-year in March. Also, inventory rose even on a seasonally adjusted basis for the second month in a row. Overall, existing home sales are 66% back to normal.
- The delinquency + foreclosure rate dropped yet again. The share of mortgages in delinquency or foreclosure dropped to 9.96% in March, down from 10.18% in February and 10.98% in March 2012. The combined delinquency + foreclosure rate is 48% back to normal and at its lowest level since October 2008.
Woulda Shoulda Coulda: Real Estate Regrets to Avoid
Trulia’s latest consumer survey revealed that 52% of people regret something about their current home or the process of choosing it. This season, under the pressure of tight inventory, buyers and renters have to try hard not to make the same mistakes
Spring house-hunting season is upon us. Home searches peak in March and April, and this year the search is especially frantic as inventory is near a 12-year low. Many homes don’t stay on the market for long, so buyers will have to move fast – especially in markets with bidding wars and competing investor activity. But when it comes to searching for a home, as with everything else, moving too fast leads to mistakes and regrets. To find out which regrets are most common – and who is most prone to making decisions they’ll later regret — we asked more than 2,000 consumers what, if anything, they regret about their current home and most recent home-search process.
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