Joe Villaescusa

Many of those in the real estate market are constantly on the lookout for the next bubble, says Joe Villaescusa. “The bubble” is a feared reference to the collapse that occurred in 2009 when over-valued homes and an over-inflated stock market popped and threw the country into recession. Now, wary investors are pointing to the increase in home prices as another bubble ready to pop even though there are a multitude of easy eye tests to prove otherwise.

After the crash in 2008 home values began a slow chugging recovery. Recently, however, home prices have began to rise quickly and the speculation has begun again. According to Joe Villaescusa those pointing toward another possible crash should take the time to consider a couple different statistics that can put their speculation to rest.

Home values are notoriously hard to predict. With a multitude of different formulas and statistics economists take what they believe to be the most relevant information available and consolidate it into one price. One of the easiest ways to spot a bubble is to look at a home’s fundamental value vs. its current market value. The fundamental value is a tricky summation of a couple different statistics, including a home’s price to rent ratio. The ratio, which compares the going rate of renting a home to the cost of actually purchasing one, is one of the only reliable factors in determining actual home value. If the actual value of a home is lower than its fundamental value buyers should take some extra caution.

Currently, homes across the nation are undervalued by about seven percent. This is still a pretty big number for those crying bubble to contend with, considering home values across the nation were thirty-five percent above fundamental in 2004. With such a long way to go until a return to pre-recession numbers, conservative estimates such as these paint a pretty clear picture. Also to consider are the metro numbers. In 90 of the nation’s 100 largest cities, homes are undervalued. There are huge disparities in cities like Detroit and Las Vegas, each of them boasting values of twenty percent or more below fundamental value currently. As the economy continues its slow push to recovery buyers and sellers can expect to see these values rise, but not significantly.

There are also areas where homes are over-valued, according to Joe Villaescusa. Cities such as L.A., Austin, and Orange County California have over-fundamental values of six to