Housing market
Signs of new housing bubble in several areas
May 17, 2013: 10:15 AM ETCities in California and Texas are already seeing the early signs of a housing bubble.
Austin, Texas
FORTUNE – Only a year after the U.S. housing market hit bottom, it may be bubbling up -- again. Odd as it may seem, some economists warn the steady rise in home prices, at least in some markets, are inflated and could eventually pop.
Prices nationwide rose nearly 6% last year -- more than most ever expected. While that has continued so far this year, leading builders to build again, prices in some places have risen faster than incomes. Eventually, they could fall back as homes become less affordable.
"If prices keeps going up at this rate for another six months, we will have a bubble, and people will get hurt," Dean Baker, co-director of the Center for Economic and Policy Research recently told Bloomberg.
The housing market may or may not be approaching bubble territory, but a handful of cities have certainly seen home prices soar beyond market value, according to Trulia, a San Francisco-based real estate data company. Of the largest 100 metro areas, Orange County, Calif., appears to be the most overvalued, with prices 9% above Trulia's estimate for fair value. Los Angeles homes are 5% overvalued, San Jose is 3%, and San Francisco real estate is 2% above fair value.
MORE: Mortgages are investment du jour for hedge funds
And even though Texas's biggest cities largely avoided the last housing bubble, markets there are also heating up. By Trulia's estimates, prices in Austin are 7% overvalued; they are 5% above fair value in San Antonio and 2% overvalued in Houston.
Indeed, prices across many parts of the country are rising just as rapidly as they did during the bubble years of 2003, 2004, and 2005, but the housing market is still far from bubble territory.
Trulia's economist Jed Kolko says when comparing what traditionally drives home prices, such as rents and incomes, the overall housing market is still undervalued by about 7%. This of course is a big improvement from the bottom of the downturn in late 2011 when prices were undervalued by 15%, but prices are far from the peak of the housing bubble when homes were overvalued by 39% in early 2006.
Some markets are clearly inflated, but there are plenty of big reasons why it's unlikely that buyers will see prices soar that much higher. With the unemployment rate at 7.7%, joblessness has held back many would-be buyers. And while more borrowers are being approved for new mortgages, lending standards at banks remain tight.
And despite big increases last year, home prices in Las Vegas and Detroit are among the most undervalued, according to Trulia. At best, the recovery is choppy. So the bubble that some fear may very well deflate before trouble abounds.
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