Is the California Real Estate Market Overvalued Again?

Is the California Real Estate Market Overvalued Again?

A an arrow that is going up on a hundred dollar bill representing that the California house market is going up.

Photo courtesy.

California makes up 4.3% of the country’s land area but 23% of its land value, and according to the financial magazine Barron’s, 6 of the nation’s Top 10 most overvalued housing markets are in California. The market doesn’t look dangerous yet, but this could be the first sign of storm clouds on the horizon.

Barron’s analysis looked at the most overpriced housing markets in the U.S. Overall, the study found that U.S home prices are 4% overvalued, lower than the 15% we saw at the start of the 2006 boom.

In California, however, the numbers are much higher.

Ten housing markets in the nation stand out as the most overvalued, and six of them are in California. The top most overvalued cities in the state are, in order: Sacramento at 14.9%, Oakland at 12.8%, Anaheim, 10.9%, Riverside, 10.6%, followed by San Francisco at 7.7 in San Diego at 6.6.

Now if you’re looking to sell your house or to leverage your home equity, such numbers are certainly to your benefit. If you’re a buyer, however, you don’t want to see these types of numbers, as such high housing costs mean it’s going to be much more difficult to afford a home.

According to Philip Reese, a numbers expert with the Sacramento Bee, the 6% increase in home prices over the last year has cut many homebuyers out of the market. Of the region’s households, almost 2/3s would be unable to afford the $320,000 median home price in California.

Let’s have a look at two major markets in Southern California and see how they relate to these numbers.

Los Angeles
Los Angeles has the most unaffordable housing market in the nation. Prices for homes in Los Angeles are 13% higher than what Trulia considers the “fundamental” level.

Trulia considers Los Angeles to be among the top three American home markets that “are most overvalued”. Sellers are listing their homes at higher prices simply because the market allows  it. The economy is improving, and the real estate investment markets and trusts are bullish. The sellers market is skyrocketing, and this, according to Trulia, could be an ominous sign.

The site looked at valid listing values, “relative to fundamentals” using such things as historical prices, rents, and incomes. According to the site, “the more prices are overvalued, the greater the chance that a bubble might be forming”. Let’s not forget that one such bubbles led to the great recession, and all such bubbles tend to burst.

Orange County
Orange County is often compared to LA in many other ways, and it’s the second most overvalued market in the country, according to Trulia, with prices 15% higher than the “fundamentals”. Compare this to Austin, the most overvalued city in the US, which has home prices 16% higher than what are considered “fundamental”.

Andrew LePage, an analyst with CoreLogic, has a more optimistic view. He believes that if sellers continue listing their homes, this will lead to a tight supply, which will eventually open the market up to buyers. If not, a rising job and wage growth could heat the market up again

While many of these signs seem to be leading to a bubble, Trulia chief economist Jed Kolko feels prices in LA and other markets are mellowing, slowing down, and avoiding a bubble. He reminds us that even the most overvalued markets are far from the bubble of the last decade,

While the market in California is certainly inflated, it’s important to keep things in perspective. The market, especially for sellers, is hot, but it’s far from the dangerous levels we saw at the end of the last decade.