U.S. Home Prices Just 3 Percent Undervalued Now

After skyrocketing up during the housing boom, then plunging after the mortgage meltdown, U.S. home prices are almost back to a happy medium according to a new report from housing data firm Trulia.com.

Trulia says that median home prices are now just 3 percent undervalued compared with historical prices, incomes and rents. That is in sharp contrast to the first quarter of 2006 when prices were overvalued by 34 percent, but it is much recovered from the 2012 first quarter low of being 13 percent undervalued. The summer buying season helped push home prices up from the second quarter of this year when home prices were undervalued by 5 percent. Last year during the third quarter, prices had an undervaluation of 6 percent.

There are some markets that are showing overvaluation at the moment. Austin, Texas was the most overvalued area at 19 percent, although it was one of the markets that was undervalued during the housing boom. California markets dominate the rest of the top ten overvalued areas, with both Los Angeles and Orange County overvalued by 15 percent, San Francisco at 12 percent, Riverside-San Bernadino at 11 percent, San Jose at 10 percent, and Oakland at 7 percent. Honolulu, Houston and Denver also made that list.

All of the nation’s most undervalued markets were in the Midwest and Northeast with Dayton, Ohio at the top, posting an undervaluation of 21 percent in the third quarter.

So even though prices have made major comebacks in most markets in the past year, Trulia is not concerned with the reemergence of a housing bubble anytime soon. “Prices are slowing to a sustainable pace and staying within striking distance of normal,” wrote Trulia chief economist Jed Kolko. He said until housing starts pick up and the employment rate of young adults improves, the likelihood of a bubble is slim.

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