Are We in a Bubble? Trulia Says No

• May 14th 2013

by Shilpi Paul

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Since rapidly rising home prices can put people in a bubble state of mind, Trulia has launched a new feature: Bubble Watch. In it, Trulia’s chief economist Jed Kolko analyzes data in major cities across the country to try and determine if prices have reached bubble level.

So, are we in a bubble? Trulia says no. A bubble, by their definition, would mean that housing prices are above their fundamental value, which is based on “supply, demand, and realistic expectations about the future.” According to calculations (more details on those below), housing prices in the country are currently 7 percent undervalued. In 2006, at the height of the recent bubble, prices were 39 percent overvalued; in 2011, by comparison, they were 15 percent undervalued. The country is currently in a rebound state, not a bubble, said Kolko. However, Trulia notes that if prices keep rising at the same rate, we may experience a bubble in a few years.

As for the DC area, we are also safe: housing prices are still two percent below their fundamental value. At the peak of the housing bubble, prices were overvalued by 55 percent.

Trulia used data from their Price and Rent Monitors, Case-Shiller, the Federal Housing Finance Agency, the Bureau of Economic Analysis, and the Bureau of Labor Statistics to come up with their calculations. They compared current prices with historical prices, incomes and rents — incomes to determine if people can afford their homes (very high housing prices aren’t sustainable if the people working in the area can’t afford them) and rents to understand how much people value the housing even if they aren’t gaining a return on their investment.

They also acknowledge that bubbles are hard to predict. For the full post and more analysis, check out Trulia Trends.

This article originally published at http://dc.urbanturf.production.logicbrush.com/articles/blog/are_we_in_a_bubble_trulia_says_no/7064.