Bubble Phobia? Philly Metro Home Prices v. Underlying Value

Real Estate Agent with Berkshire Hathaway HomeServices Fox & Roach, Realtors® AB066532

Over the past two years any upward movement in Philadelphia Metro areahome prices tended to raise a question in many local minds—a question that ends with the word ‘bubble.’

As with any commodity whose price is determined by a changeable mix of subjective public perception as well as supply and demand, when home prices head north, there is always the possibility that a ‘bubble’ could be inflating: an unsupportable rise that could suddenly plummet with a “pop!”

Now comes some reassuring news on that score. According to a report from real estate website Trulia that covers this year’s first quarter, the national average of home prices looks to be 5% undervalued when measured by the yardstick of long-term fundamentals. If they’re right, home prices can continue to rise for a while before even the first stages of a bubble start to fizz.

As with any kind of market projections, home prices are subject to movements that can change when unexpected factors develop: there are never any guarantees (and anyone who says otherwise probably knows better). And evaluating true underlying values is complicated. Even a straight-line look at the percentage rise in home prices is a poor indication of over- or undervaluation. Because of the 2007 drop in residential real estate in many parts of the country, prices can increase by significant percentages without touching the highs of 2006. An example is Las Vegas, where prices would seem to have exploded (increasing by almost 60% in the last couple of years)—yet remain affordable by many measures. 

The truth is, there are a number of different ways to measure whether a home is over- or undervalued, and each is valid in its own right. You can look at how current home prices measure against long-term trends, or how prices measure up against an average income—or just compare them against the current cost of renting. I tend to favor the report produced by Trulia because it takes into account a whole range of different indicators to produce a truer picture of the affordability of real estate across the country.

There are less data-based, more common sense reasons to fret less about an emerging bubble. Last week, Real Estate Economy Watch reported that Fannie Mae’s economists are tempering their estimates for both sales and price increases, even as the outlook by both prospective home buyers and sellers continues to improve. “The share of respondents who believe now is a good time to sell a home increased for the third consecutive month to an all-time high of 42%” and “…the share of respondents who say now is a good time to buy a home remained steady at 69% following a gradual climb since the beginning of the year.”

When you remember that new regulations around lending mean we are unlikely to see a repeat of rampant subprime lending, any tendencies toward “bubble phobia” should be dampened.

John Badalamenti is an Associate Broker/Sales Coach with Keller Williams Realty – Center City, Philadelphia – Serving the Greater Philadelphia and Main Line area. John can be reached via email @: johnbadalamenti@kw.com

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