5 Overvalued Housing Markets

BOSTON ( TheStreet) -- Home prices are rebounding so much in some U.S. cities that property values have actually risen beyond what local economic fundamentals justify, market watcher Trulia.com says.

"These are generally markets that have seen big price increases in the past year," Trulia Senior Economist Jed Kolko says. "They've had some of the strongest price rebounds in the country."

Trulia recently analyzed two key housing-market measures -- price-to-income ratio and price-to-rent ratio -- to see how current home values in America's 100 largest cities compare with historic norms.

The site found that overall U.S. home prices are 7% below where the two indicators suggest property values should be, as much as 9.4% too high in nine cities.

Kolko attributes the individual markets' excesses primarily to low inventories and strong demand that have pushed property values beyond what local incomes and rents can explain.

But he adds that U.S. home prices peaked at 39% above fundamental levels during last decade's housing boom, "so we have a long way to go before we're back in bubble territory."

Here's a look at five cities that Trulia found have America's most overvalued homes.

The site estimated property values by looking at asking prices for residences recently listed for sale on Trulia.com, coupled with historic readings of the S&P/Case-Shiller Home Price Indices and Federal Housing Finance Agency data. Trulia then calculated price-to-income and price-to-rent ratios using U.S. government economic statistics for each metro area.

Fifth-most-overvalued market: San Jose, Calif.

How much prices exceed fundamentals by:

Asking prices for homes in Silicon Valley's biggest city rose 22.9% over the past year even as rents fell 4.8%, helping push property values 2.9% above market fundamentals.

Kolko says strong tech-job growth is driving San Jose's property values beyond what's justified.

But he believes the city is a long way away from a new bubble. After all, Trulia estimated San Jose home prices got as high as 59% above market fundamentals in 2005.

Fourth-most-overvalued market: Los Angeles

How much prices exceed fundamentals by:

The City of Angels has gotten a little bit devilish when it comes to property values.

Asking prices for L.A. homes shot up 13.7% over the past year -- way above a 1.6% increase seen in rents.

Kolko attributes the rising prices to strong demand sparked by good job growth and plenty of real estate investors, coupled with inventory shortages caused by lots of "underwater" homes. Those are properties where the owners can't easily sell because they owe more on their mortgages than the homes are currently worth.

Still, Trulia calculates Los Angeles property values haven't come close to the 78% over economic fundamentals that they reached in 2006.

Third-most-overvalued market: San Antonio, Texas

How much prices exceed fundamentals by:

Home prices are rising above fundamental levels in San Antonio and other Texas cities because the state's booming energy industry is spurring demand, Kolko says.

He adds that property values in much of the Lone Star State didn't fall that sharply during the housing bust, so homes weren't all that cheap to begin with.

San Antonio has seen asking prices increase 7.6% over the past year even as rents gained just 4%. That's helped push prices to 5.1% above where fundamentals suggest property values should be, according to Trulia's calculations.

Still, today's excess valuations are less than half of the 12% above fundamental levels that Trulia estimates the San Antonio market saw in 2007.

Second-most-overvalued market: Austin, Texas

How much prices exceed fundamentals by:

Like San Antonio, Austin is seeing home values increase partly because of good times for the state's energy sector, according to Kolko.

The city's large tech industry has also helped push average asking prices up 8.5% over the past year. That's well above the 6.3% increase in rents that Austin recorded in the past 12 months.

But the Texas capital looks like it's clear of a bubble so far. During the housing boom, Austin's home prices peaked at 12% above economic fundamentals in 2007.

No. 1 most-overvalued market: Orange County, Calif.

How much prices exceed fundamentals by:

This popular residential area adjacent to Los Angeles has seen asking prices on homes shoot up 18.6% over the past year. That's far above the 3.2% gain recorded for rents.

Kolko attributes the higher property values to strong investor demand, good job growth and a dearth of available residences due to underwater homes.

But again, Trulia doesn't see a bubble forming. The site estimates Orange County home values got as high as 71% above market fundamentals in 2006.