Is the Housing Bubble Already Making a Comeback?

A financial bubble typically takes a very long time to re-inflate, but the recent strong performance in the real estate market has many people wondering if another bubble is forming.

Due to the rebound in home prices, Trulia has launched a feature called Trulia Bubble Watch. The new housing market indicator tracks whether home prices are in or nearing bubble territory by measuring how home prices are valued relative to their fundamentals. It gauges the housing market across the nation by looking at 100 of the largest metro areas.

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According to Trulia, national home prices are still 7 percent undervalued. In comparison, the housing bubble of yesteryear saw home prices become overvalued by almost 40 percent in the first quarter of 2006. After the bubble popped, home prices became 15 percent undervalued in the fourth quarter of 2011. However, certain areas of the country are seeing houses become overvalued.

The Trulia Bubble Watch finds that 8 of the 100 largest metro areas have home prices above their fundamental value, with half of those being located in California. Cities such as Orange County, Los Angeles, San Jose, and San Francisco are all seeing home prices heat up, but still remain well below their pre-crisis peaks. Texas metros such as Austin, San Antonio, and Houston are also overvalued when compared to the fundamentals. Portland, Oregon, rounds out the list.

“Home prices fell so much after the last bubble burst that they still remain below normal levels even as prices rise sharply today,” said Jed Kolko, Trulia’s Chief Economist. “Several forces are waiting in the wings that should slow down today’s rapid price gains before they rise into bubble territory again. More inventory, higher mortgage rates, and fading investor activity would each take home-price gains down a notch.”

The latest reading from the Standard & Poor’s/Case-Shiller index showed a 9.3 percent jump in home prices for February, compared to the prior year. Home prices in 20 major metropolitan areas rose at their fastest rate since May 2006, and beat expectations calling for a 9 percent gain. In fact, all 20 cities posted year-over-year gains for the second consecutive month, which has not happened since 2005. The Case-Shiller index is not seasonally adjusted and uses a three-month average.

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Meanwhile, a separate report from CoreLogic shows that home prices across the nation increased 10.5 percent year-over-year in March, the biggest gain since March 2006 and the thirteenth consecutive monthly increase.

Kolko warns, “Although we’re far from bubble territory today, there’ll be another home-price bubble someday, somewhere. The history of American real estate is full of speculation, bubbles, and busts. Even now, most people expect home prices to get back to the peak of the previous bubble again in the next 10 years. Prices may be far from bubble levels today, but we need to stay on guard for signs of the next bubble.”

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