I have a app which is under source control (TFS 2012 also) on c:\\Dev\\MyApp\\Main.
Because im developing a new feature I decided to open a branch on c:\\Dev\\MyApp\
Restarting VS seems to fix this problem. This is just an alternative solution, just as its a norm with all Windows products - close and restart, and boom it'll work!
Here's what happened: I faced the same problem after I worked on a web project in a branch using VS2013. As Chris Gillum mentioned above, I had the applicationhost.config open while I restarted VS, and the file got auto-refreshed with the correct path. So, this definitely seems to be a bug in Visual Studio.
UPDATE:
I've seen this issue numerous times since I posted this answer. And I've found an alternative to restarting VS. Here's what I do now:
Search for and fix the physical path to your workspace under the following section:
IISExpress will automatically refresh the site, and you do not need to restart VS. Hope this helps someone.