TRULIA: Home Prices Aren't In A Bubble, They're Actually Undervalued

Trulia's proprietary "Bubble Watch" index suggests home prices are actually 3% undervalued in Q2 2014, relative to long-term fundamentals, writes Jed Kolko at Trulia.

To gauge whether home prices are over- or undervalued, Kolko considers "the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trends using multiple data sources."

"Sharply rising prices aren't necessarily a sign of a bubble; a bubble is when prices look high relative to fundamentals," explained Kolko.

Kolko expects that home prices will be neither over nor undervalued come Q4 2014 or Q1 2015.

How does this compare with the top and bottom in housing? According to Trulia's index, home prices were 15% undervalued at the Q4 2011 bottom and 39% overvalued at the Q1 2006 top.

For those worried about a newly inflated housing bubble though, Kolko writes that there's no reason to worry since the pace of home price growth is actually slowing.

Here's a look at the latest Bubble Watch chart: