Prices are below their fundamentals in 91 of the 100 largest metros. Overvalued markets include Orange County, California, Los Angeles, San Jose, San Francisco and the Texas metros of Austin, San Antonio and Houston. But even these markets are not as overvalued today as they were in the bubble years. Orange County was 71% overvalued in the first quarter of 2006. Meanwhile, despite the strong gains in Las Vegas, the market remains among the most undervalued. Several Florida cities also remain undervalued relative to fundamentals. Housing analysts have become increasingly bullish on the housing recovery. Affordability is the best it has been in years, they say, thanks to rock bottom interest rates. Meanwhile, investor demand is helping clear distressed inventory from the market at a rapid pace, removing the overhang from the market. The lack of new construction in recent years and the dwindling supply of existing homes has led to a shortage of inventory nationwide, causing prices to surge even higher.
Still, the fact that incomes have largely remained flat and mortgage credit remains tight means home ownership is within reach only to a privileged few. There isn't enough real demand for homes to support the rise in home prices, argue housing bears. But prices are still not out of whack with fundamentals. What's more, home prices are likely to slow in the next year or two anyway, according to Trulia's Kolko. For one, as home prices rise, inventory will expand as new construction picks up and sellers are lured back into the market. Secondly, the current low interest rates will not last forever. Either a strengthening economy or Fed action could cause interest rates to rise, slowing price gains. And finally, investor demand will slow as prices continue to rise and interest rates move higher. But the recovery will likely remain intact. "Just as these factors should cause home prices to slow down, job growth and increased household formation should support a continued recovery in housing demand," wrote Kolko. -- Written by Shanthi Bharatwaj in New York. >Contact by Email. Follow @shavenk