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Home Prices Still Modestly Undervalued: Trulia

Stocks in this article: XHB IYR

NEW YORK ( TheStreet) -- Home prices are still undervalued relative to their fundamental value, according to online real estate company Trulia's Bubble Watch.

Although home prices have risen 11% over the past year, national home prices are likely 5% undervalued in the third quarter, suggesting that all the bubble talk in housing is overdone. Homes in the United States were overvalued by as much as 39% during the first quarter of 2006.

Trulia determines whether a housing market is overvalued or undervalued by comparing home prices relative to historical prices, incomes and rent.

Of the 100 largest metros, 81 are still undervalued. Among those that are overvalued, only two markets are overvalued by at least 10% -- Orange County, Calif., and Los Angeles. Other overvalued markets include three Northern California metro areas -- Oakland, San Jose and San Francisco -- and four Texas metros -- Austin, San Antonio, Houston and Dallas -- and Honolulu.

The most undervalued markets include several Florida and Ohio markets. Despite a 33% rise in home prices in Las Vegas over the past year, homes in the area are still undervalued by 16% relative to their fundamentals.

Home prices are less undervalued than they were a year ago, when they were 14% undervalued.

But the pace of home price gains is also showing signs of slowing.

Asking prices grew at a slower pace in July, rising 0.3%.

Rising mortgage rates, increasing inventory and fading investor interest are all likely to cap the gains in prices, according to Trulia economist Jed Kolko.

"Even though prices look less undervalued than last quarter or last year, the price slowdown means our chances of avoiding the next housing bubble just got better," he wrote.

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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