With the housing rebound having gained significant traction throughout the past year, certain sales regions have ascended in property value with exceptional speed. This has naturally lead to broad concerns that specific areas are showing signs of a localized bubble, with certain high-demand/high-sale markets gaining price traction with unforeseen speed. One of the ultimate concerns remains as to whether or not the gain in prices throughout especially popular metro regions will occur so quickly that it precludes most first-time buyers from being able to consider purchase at all.
According to a recent story in the Los Angeles Times, signs are accumulating that this trend is becoming increasingly pronounced in housing markets throughout Southern California. Singling out both Orange and Los Angeles Counties, the Los Angeles Times piece cites analysis from the Trulia.com “Bubble Watch” release that places heavy red flags on communities throughout metro LA. Noting that both counties are “still way less overvalued than during the height of the bubble”, there are increasing warning signs that make both regions seem like uneasy areas for both purchase and investment.
In terms of Trulia.com’s specific measurements, the website ranks Orange County’s prices as the most overvalued in the country at 12% elevation, while Los Angeles County ranks not too far behind at a pronounced 10%. While these are far from comforting figures, they’re still far from the apocalyptic numbers that predated the crash. According to the Los Angeles Times report, Orange and Los Angeles counties were 70% and 78% overvalued during Q1 2006.
What’s the Takeaway?
Luckily, current prices are far from threatening to long-term stability, but their continued ascent would pose an array of problems for both homeowners and prospective buyers. Assuming trends proceed unabated for another few quarters, both markets would be teetering dangerously close to bubble territory. It seems that rising mortgage costs and expanded inventory, along with the flagging interest from cautious investors, may go a long way towards diminishing price gains. As a point of comparison, Trulia.com’s figures note that national home prices are collectively 5% undervalued compared to long-term measures.
Regional overvaluation is still abnormal and a sign of eccentric local activity, and should remain a warning sign to those considering investing in local property. Granted, the fact that California real estate investments can turn sour far from new news. As I noted in a prior post, many of the most promising long-term investment markets remain far away from the coasts, and are largely located in the Midwest and the upper South. Prudent investors would, as always, be well advised to consider areas where the appreciation in prices isn’t as meteoric as it has become near Los Angeles. Quick value gains remain tempting at first glance, but present the chance of turning toxic with irreversible speed.
Photo: BKLSouthern California Housing Markets Increasingly Overvalued by Harrison Stowe