Are home prices in the US undervalued or overvalued!


According to Jed Kolko, Chief Economist at the real estate website Trulia, home prices on the national level are 3% undervalued!

But that’s not the end of the story.

There is no question that many metropolitan areas around the country have seen large price gains in residential home prices since the financial crisis lows set back about six years ago.

That being said, are we therefore in the formation stage of a new real estate bubble as some claim?

Maybe and then again maybe not but the thinking may be understandable if these bubble prognosticators are looking at the $100 million-plus asking prices for some Manhattan apartments, including the $118 million PH at the Ritz-Carlton in Battery Park, to make their determination.

What needs to be put into context, however, is that some of the outsized home price gains have resulted due to the rise from a low financial crisis base . This base resulted from the sharp and steep drop in real estate values, particularly in some of the regions like Miami, Las Vegas and Phoenix that had skyrocketed due to speculation and the ease of acquiring a mortgage.

According to Mr. Kolko, of the nations 100 largest metro areas, 76 are undervalued while only 7 are overvalued by more than 10%. The metrics that he uses to form his thesis compares the prices in the market today with historical prices, incomes, and rents (see in-depth description of methodology here).

Below are charts showing the Top 10 Undervalued and Top 10 Overvalued Metro Areas in the United States (Source)

Top 10 Metros Where Home Prices Are Most Overvalued
# U.S. Metro Home prices relative to fundamentals, 2014 Q2 Home prices relative to fundamentals, 2006 Q1 Year-over-year change in asking prices, May 2014
1 Orange County, CA +17% +71% 9.6%
2 Honolulu, HI +15% +41% 5.3%
3 Los Angeles, CA +15% +79% 12.7%
4 RiversideSan Bernardino, CA +13% +92% 18.8%
5 Austin, TX +13% +8% 9.7%
6 San Jose, CA +11% +58% 10.4%
7 Oakland, CA +10% +72% 14.8%
8 Ventura County, CA +9% +73% 12.6%
9 San Diego, CA +7% +69% 11.2%
10 San Francisco, CA +6% +51% 11.6%

 

Top 10 Metros Where Home Prices Are Most Undervalued
# U.S. Metro Home prices relative to fundamentals, 2014 Q2 Home prices relative to fundamentals, 2006 Q1 Year-over-year change in asking prices, May 2014
1 Akron, OH -21% +18% 4.7%
2 Cleveland, OH -21% +18% 6.3%
3 Detroit, MI -19% +38% 15.2%
4 Dayton, OH -16% +13% 12.1%
5 Worcester, MA -15% +43% 4.4%
6 Memphis, TN-MS-AR -14% +11% 3.2%
7 Toledo, OH -14% +22% 10.0%
8 Chicago, IL -14% +36% 13.5%
9 LakelandWinter Haven, FL -14% +54% 3.8%
10 Providence, RI-MA -14% +52% 2.9%

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