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Trulia analysts say national housing bubble threat is mild

Trulia’s report did not deny that, for certain metro areas, bubble traits do exist locally. Particularly in California, the inventory shortage needs to be addressed.

Rising property values seen across the country during the summer and into the fall of 2013 have drawn mixed reactions. Some view the rates of appreciation as promising signs of the housing market's return to viability. Others have expressed concern that median home prices that are rising faster than income rates in some areas portend another housing bubble and subsequent crash.

At least one industry analyst, Trulia chief economist Jed Kolko, has offered some reassurance that the current market conditions lend themselves to sustainability, rather than history repeating itself in the form of another housing market downturn. With the release of Trulia's latest Bubble Watch, which monitors the relative under- and over-valuing of residential properties, Kolko provided some perspective on the current rates of appreciation.

Of the 100 metropolitan areas examined in Trulia's Bubble Watch, only two - greater Los Angeles and neighboring Orange County - currently feature prices considered to be more than 10 percent overvalued. Nationally, Trulia determined that home prices are actually undervalued by 5 percent, compared with an overvalue as high as 39 percent during first quarter 2008 - generally regarded as the height of the bubble. For further perspective, Kolko estimated that two years ago - fourth quarter 2011 - national property values were undervalued by 15 percent.

Understandable skepticism
Still, as large-scale investors and other multi-property investors have bought homes in mass, often rehabilitating and reselling them at significant price hikes, many metro areas have experienced alarmingly rapid escalations in prices. As neighborhood demographics have shifted with many residents suddenly priced out, an understandable level of concern has emerged.

"If prices nationally are 4 percent undervalued, why are so many people worried that a new bubble is forming?" asked Kolko. "Because prices have risen quickly over the past year, and even with the recent slowdown in the past few months, rising prices stoke bubble fear."

National asking prices had increased 11.7 percent on a year-over-year basis through October, according to a HousingWire report. That rate of sharp increase is comparable to what was seen in 2004, when the bubble was inflating. Those parallels have caused some experts to conclude that the current rate of appreciation is indeed cause for real concern, especially considering that many American homeowners and prospective buyers are still recovering from recession-induced ills.

"For the average American household, they are in a housing bubble," said Anthony Sanders, a finance professor at George Mason University in Fairfax, Va., who responded with skepticism to Kolko's analysis in a recent blog post. "For Chinese and other domestic and foreign investors, house prices are a bargain."

Indeed, the concept of affordability is a relative one, and with income growth, employment rates and new construction making progress yet still lagging behind the rates of price appreciation in certain areas, many Americans are simply not equipped to handle the current marketplace. Kolko assured, however, that price levels today don't compare to what was seen in 2004. Back then, residential homes were overvalued by 24 percent on average, as opposed to the slight undervalue that exists today.

Rate of growth already slowing
In certain areas, rising prices have already begun to plateau, and in others it's simply a matter of inadequate inventory. In Boston and San Francisco, demand continues to exceed supply or, for that matter, the available space geographically. New home starts and rates of construction are expected to gain steam in 2014, which should help remedy the issue. In particular, the Atlanta, Denver, Houston, Salt Lake City, Seattle and Tampa metro regions are targeted for significant employment growth that will coincide with more available new housing through construction. That should lend itself to prices leveling off further and a new wave of homebuyers encouraged to enter the market.

The other important distinction between the current marketplace and that of the pre-recession housing bubble is in terms of lender approach. Sloppy underwriting techniques and a rash of subprime mortgages no longer threaten to undermine market stability. Banks and lenders have placed a renewed emphasis on risk assessment practices and loss mitigation tactics. Thanks in part to a wave of recession-induced government regulation, standards have changed. While those changes may keep certain consumers on the sidelines, they ultimately create a healthier, more sustainable housing finance environment.

Trulia's report did not deny that, for certain metro areas, bubble traits do exist locally. Particularly in California, the inventory shortage needs to be addressed. Aside from Los Angeles and Orange County, the Riverside-San Bernardino area and the Bay Area - particularly Oakland - have seen prices rise to levels of overvalue. Oakland is experiencing the fastest rate of appreciation, with prices estimated at 31 percent inflation on average.

Still, most industry analysts believe that unless a rate of appreciation of 15 to 20 percent nationally continues deep into 2014, the threat of any truly damaging bubble is minimal. As long as new homes are built and made available to new buyers at a healthy rate, the market appears to be headed for stability rather than volatility.