Southern California Housing Markets Increasingly Overvalued

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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: BKL

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About Author

Harrison Stowe is a writer for NVR Inc., a prime developer of Baltimore new homes. Addressing a range of topics including investing, mortgages, and real estate, Stowe combines finance knowledge with additional experience working with Ryan Homes in the current real estate market.

10 Comments

  1. What does it actually take to chase a Californian out of the southern part of the State?
    From back east we see fires, earthquakes, insane prices, and just as insane taxation.

    Exactly how do you folks make enough money to pay the bills?

    Last week in Philadelphia, PA I bought a house for $13k, it needs $20k of renovations, and will rent for $800 when done. The taxes are $278 a year, insurance $550, the tenant will pay all other expenses. The house will have an ARV of $70k.

    Am I missing something, New York City is probably the nearest market to my area that compares with Southern CA. Quiet a few NY’ers are buying in Philly with the idea of having cash flow.

    Can anyone explain to me how investing in CA and NY is anything but speculation hoping for appreciation if there isn’t cash flow?

    • Dennis, I live in the heart of Orange County as I was born here. But, I hate California because millions of folks Love it here. There are lines every where. A small theater is one with only 30 screens. The average house here has four cars parked in front. But, you can have a beach picnic for Christmas, head to the mountains which are only an hour away, when it gets hot, and have fresh, locally grown strawberries in January. We lived in Colorado for a few years and when we moved back, my wife DOUBLED her salary (RN).

      Real Estate here is a crap shoot. If you catch it low, you look like a Guru and if you catch it high, you look like a chump. Not the place for the faint of heart investor. But the fact is millions of people love it here, therefore demand for housing is always high. It is mainly when the government requires lenders to make subprime loans that we get folks into loans they cannot repay and we get into trouble.

      • Mike,

        If you can remember the TV show Green Acres, I’m the country guy at heart, my wife however is the edge of the city, suburban girl. To think she grew up on a farm, and I spent most of my life working my business in the city. When crowds form I head the opposite direction.

  2. I think I must not understand what a bubble is. I think that a bubble is when prices are much higher than they should be, when old houses start selling for more than the equivalent new houses. In most areas of Southern California the cost of building new homes is still much higher than the sales prices of existing houses.

    When we crashed here we lost 70+% of our 2006 prices, we chuckled when we heard the midwest complain about losing 25 to 30%. Now we have regained some of the pricing we lost and people starting chicken littling “bubble, bubble, bubble” How does Chicken Little define a bubble?

    • Andy,

      I think it depends where you are in SoCal as it is the market size of a medium sized country. Here in the city of Los Angeles, we only lost about 35% from the peak and have gained just about all of it back.

      I wonder how much of the increase is fueled by overseas buyers as their buying seems to be taking off lately.

      I agree that now is not the time to be buying real estate here (unless you can get a great deal somehow) as the ship has mostly sailed.

      • I think you are seeing overseas buyers unloading dollars for hard assets. If you were holding US dollars in large quantity on the other side of the ocean and then see the Fed buying 100% of the Treasuries sold, what would you do with those dollars. Choices: buy gold, oil, farmland or housing. Gold is a hedge that does not pay interest, and can swing wildly in price as we have seen recently. Great RE is always going to hold value, rents rarely go down.

        Our last bubble created a new wave of tenants who might never be able re-enter the housing market as buyers. If they do landlords can sell their supply of good housing into the market. I can assure you this is the only plan of these hedge fund groups, they are short term investors for the most part.
        In my opinion the business of landlording is really the least capital efficient way to make money in REI.
        Selling and providing financing is the way to go, someday I am going to explore both.

  3. As a midwesterner I just don’t get the mindset that you want to live in an overcrowded area with horrendous taxes and never be able to have a comfortable lifestyle. A personal example is my son and daughter-in-law who have recently moved to Omaha from Santa Barbara. Within several weeks they were able to buy a 5bd, 4bth house they never could have bought in SB as it would have been 5 times the price. They would have been stuck in an apartment forever if the had stayed in SB, now they’ll be able to “have a life” not just live.

  4. California RE investing is very different from other locations around the country, but the best place I can equate it to is Arizona. Florida is far off from having a bubble, we rank in 9 of the top 10 foreclosure markets, so we have a ways to go to get to the frothiness of California. I do always tell friends who want to get into RE to watch what happens in CA and AZ, because they were the first states to run prices up, so naturally, they should be the first to watch to see the next cycle and when it happens. Destination cities in FL (Orlando, Miami) are hot, but business areas like Tampa and Jacksonville are still depressed. The business has not come back yet, so I would look at unemployment in these cities as an indicator of heat, when unemployment is dropping, you will see heat on the market in terms of higher prices for housing.

    Jack

  5. Hi Harrison! Really Great information you shared with us, and yes. I agree with you southern California housing is overvalued, as compared to other. Thanks for the post.

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