U.S. house prices are only undervalued by around 2% on average, according to the latest research, but they’re still overvalued — and undervalued — by double-digit percentages in some metro areas.
American house prices are on average almost back to normal in the fourth quarter of 2014, after being undervalued by as much as 5% one year ago and 3% in the previous quarter, but the extent they’re undervalued or overvalued still varies dramatically among the 100 largest metro areas, according to real-estate website Trulia. In the first quarter of 2006 at the peak of the housing market bubble, U.S. house prices were overvalued by 34% before dropping to 14% in the first quarter of 2012.
“The more prices are overvalued, the greater the chance that a bubble might be forming,” says Jed Kolko, chief economist at Trulia. Overvalued doesn’t necessarily mean those homes are unaffordable. New York and Boston both look several percentage points undervalued relative to long-term fundamentals, but they’re far more expensive than Houston or Austin. Trulia analyzed home prices in 100 metro areas relative to fundamentals such as jobs, income growth and household formation and rents.
Home prices in 70 of the 100 largest metros are less than 10% over- or undervalued, Trulia found, the highest number since the recovery began. Home buyers making the U.S. median income and purchasing the typical U.S. home spend 15% of their income on their monthly house payment (excluding insurance and taxes) down from the historical norm of 22% during the pre-bubble boom of 1985 to 1999, according to separate data released in December by housing website Zillow.
In Trulia’s latest report, the most overvalued market in the U.S. was Austin, Texas (overvalued by 16%), followed by Orange County, Calif. (15%), Los Angeles (13%), Honolulu (13%) and San Francisco (12%). In fact, the median price for single-family homes in Austin was $245,000 in November 2014 versus $189,300 in November 2011, while the average price was $251,838 in 2014 versus $311,222 in 2011, according to data released last week by the Austin Board of Realtors.
Almost all of the most undervalued metro areas are in the Midwest and New England, and almost all were either in Ohio or Connecticut, Kolko says. Cleveland was undervalued by 20% (versus 13% 2006), Akron was undervalued by 17% (versus 12% in 2006) and Dayton was undervalued by 17% (compared with just 8% in 2006). Hartford was 15% undervalued in the fourth quarter of 2014 (versus 20% in 2006) while Fairfield County was undervalued by 14% (versus 30% in 2006).