Home Price Increase is More Than a Bubble

The quick increase in housing prices the past year has created conversation of another housing “bubble, but experts say that only a few markets are at risk.

U.S. home prices rose 10.9% from March 2012 to March 2013, which is the largest annual gain in seven years. Even with this dramatic increase, home prices are still off their 2006 high.

Traditionally, average U.S. housing prices are 3.25 times the average household incomes, and as of April, home prices were about 3.2 times the average U.S. incomes. However, some markets are worrisome in California and may have a bubble effect.

San Francisco and Orange County are two of these areas. San Francisco prices were up more than 22% from March 2012 to 2013. Typically average home prices are eight times the average household incomes, but now they are ten times larger.

In April, Orange County prices were 7.5 times the median incomes, which is greater than the usual average household incomes of six times, which is typical for that particular area. Real estate website Trulia deemed these cities as “overvalued” relative to housing supply, demand and expectations about the future.

Six other markets have also been rated as overvalued: Austin, San Antonio, Los Angeles, San Jose, Houston and Portland (Oregon). Nationally, home prices are still undervalued by 7%. In 2006, prior to the collapse of the last housing bubble, prices were as much as 39% overvalued.

Boston is up 6.7% annually from March 2012. The pace of home price increases is expected to slow as more inventory becomes available, mortgage rates increase and investor buyers slow down purchasing.

In April the supply of existing homes for sale grew to 5.2 months, up from 4.7 months from March; meaning that all the homes would sell in that time frame if no new supply were added. Realtors consider a six month supply to be a balanced market between buyers and sellers.

If you are looking to purchase or sell real estate, feel free to contact Pulgini & Norton, LLP at (781) 843-2200 or (888) 344-2046, or email us with any questions you may have. Our attorneys offer nearly 40 years of combined legal experience and provide thorough, timely, and results-driven service in many aspects of both residential and commercial real estate.

Cited Sources:

Home price jump is more rebound than bubble, USA Today, May 28, 2013