Through August, CoreLogic figures that national median home prices have risen 17.5 percent during a 20 month run that’s now tapering off.  According to the October 2014 CoreLogic HPI™, in 2013 alone, national home prices rose by more than 11 percent. By August, national home prices had risen another 6.5 percent year-to-date.

Wealthy is not necessarily healthy when it comes to real estate prices.  While some saw the appreciation as regaining ground lost in housing crash that began in 2007, others raised concerns about the formation of bubbles in the hottest regions and even at the national level.

In early 2014, CoreLogic released Market Condition Indicators, designed to track the health of local housing markets. The Market Condition Indicators evaluate the levels of home prices and compare them to the long-run sustainable levels that can be supported by local market fundamentals, such as disposal income. Because most homeowners use their income to pay for home mortgages, there is an established relationship between income levels and home prices. In the long run, home price growth cannot be sustained above income growth because housing would become unaffordable, demand would decline and home price growth would either slow or decline to realign with income levels.

In each market, CoreLogic calculates the gap between actual or forecasted home prices and their long-run sustainable levels. Using 10 percent as the threshold, we define an “overvalued market” as one where the house price is more than 10 percent of its long-run sustainable level. Similarly, an “undervalued market” is one where the house price is less than 10 percent of its sustainable level.

The new income-based indicators suggest bubbling isn’t happening yet. Overall, despite significant house price growth since 2012, most markets are still well within sustainable levels, with most still recovering from the market collapse.

However, it found that on an individual basis some of the nation’s hottest markets are overvalued based on sustainability while others are undervalued.

Table 1 shows the four overvalued markets of the top 50 CBSAs. Topping the list are two metros in Texas: Austin and Houston, where an oil and gas boom has fueled job growth and population growth, pushing home prices well above their sustainable levels. Home prices in these two markets are also well above their historical peak levels: 22.8 percent for Austin and 16.2 percent for Houston. The other two most overvalued metros are Miami, Fla. and Washington, D.C. As home prices have risen significantly since 2013, homes have become less affordable in these two markets, and therefore, prices are less sustainable.

Table 1: Overvalued Metropolitan Areas

Metropolitan Area	% of Home Price Relative to the Long-Run Sustainable Level	Home Price Appreciation in 2013	Home Price Appreciation Since Jan. 2014	% of Home Price Relative to the Peak Level Before Dec. 2007
Austin-Round Rock, TX	35.2%	10.5%	8.7%	22.8%
Houston-The Woodlands-Sugar Land, TX	18.9%	11.0%	10.3%	16.2%
Miami-Miami Beach-Kendall, FL	14.5%	11.1%	8.4%	-30.0%
Washington-Arlington-Alexandria, DC-VA-MD-WV	18.6%	8.2%	4.2%	-13.1%

 

On the flip side, Pittsburgh, Pa. tops the list as the most undervalued metro, as shown in Table 2. Pittsburgh did not endure severe downturn during the market collapse. While its home price level is now about 14.7 percent more than the peak level prior to the recovery, the disposal income per capita in Pittsburgh has risen even faster at 21.1 percent, leading to a 25 percent gap relative to the sustainable home price level. Other major undervalued metros include Providence, R.I., Cleveland, Ohio, and Sacramento, Calif., where home prices are still significantly below their historical peak levels, in spite of strong recovery in housing markets and rapid increases in disposal income.

Table 2: Top Four Undervalued Metropolitan Areas

Metropolitan Area	% of Home Price Relative to the Long-Run Sustainable Level	Home Price Appreciation in 2013	Home Price Appreciation Since Jan. 2014	% of Home Price Relative to the Peak Level
Pittsburgh, PA	-25.5%	3.8%	8.2%	14.8%
Providence-Warwick, RI-MA	-25.1%	4.8%	5.4%	-25.9%
Cleveland-Elyria, OH	-20.8%	5.0%	7.7%	-14.0%
Sacramento-Roseville-Arden-Arcade, CA	-18.5%	20.8%	7.6%	-27.1%