Is California Real Estate Overvalued?

California is by no means a cheap place to live, but a recent report conducted by Trulia has revealed that Southern California is one of the most overvalued real estate markets in the country. Although home values remain at a safe level at the moment, it’s important to note these changes as an overvalued market could indicate another bubble.

According to Trulia’s second-quarter “Bubble Watch” report, Orange County and Los Angeles County are currently the most overvalued markets in the country. The two counties remain at 12% and 10% above where they should be priced respectively.
Although these rates are slightly higher than the average nationally – which is 5% undervalued – they still remain far below the pre-crisis levels which they once were at. At the height of the bubble, prices were 70% overvalued in Orange County, and 78% overvalued in Los Angeles County.

An overvalued market can lead to an assortment of problems, but many experts believe there is no reason for concern with prices at their current levels. Jed Kolko, Trulia’s chief economist, is one of the many who trust that these overvalued properties will not lead to another bubble, at least not yet. Kolko recently commented saying, “No worries about a bubble now — if prices kept rising at their current rate, in a couple years we would be back into bubble territory.”

It’s unlikely that this will become a problem though. With the recent increase in mortgage rates, the growing supply of houses on the market, and a loss in investor activity, it’s likely that these increasing prices will soon flatten out.

Have overvalued properties been affecting your business? Do you think the overvalued market will lead to another bubble? What are your thoughts?

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  • Robert Loughran

    I am always concerned that our market will over-inflate, with that being said, I have done some research and find Trulia’s metrics to be lacking in several areas. Unfortunately, many are leaning way too much on Tulia when seeking property values. In my humble opinion.

    • David Choo

      I absolutely agree with you Robert.

      Folks that rely on trulia or zillow or any of the online valuation engines (that are not based in the slightest on the actual quality of the home nor position within a community), are asking to be hurt.

      I do feel the market will flatten out for some time while people get used to the new higher interest rates (that are still historically low). However as banks figure out how to bring out products like stated income once again (and they will, it’s already being devised), prices will surge again.

      We are not in a bubble yet. Bubble’s are caused by over leveraging. The people buying these homes at these prices are putting 50% down to paying all cash. This is very different from 2006.

  • Sean Trinh

    In my opinion, all buyers out there should do themselves a favor by requesting their selling agent to provide a thorough comparable market analysis/report with all available current comparable closed sales not more than 3-4 months old (if the market is changing quickly, within 6 months if the market is stable) and within no further than 1 mile radius of the subject property’s proximity (unless there is no available closed comparable sale nearby).
    These conditions are two important elements among the standard guidelines the lenders/underwriters go by. A good, knowledge, and well trained selling agent should be able to do this simple task. After all, it is the selling agent’s fiduciary duty to its client.

    So if any appraiser (with intention of pumping up the value to please the lender or to ease the pressure from the lenders) comes in with an appraisal report of a value that shows much higher than the previously estimated and projected value, the buyers could use its selling agent’s provided preliminary report to compare against to that of appraiser’s to see if there is any worthily considered comparable closed sales being left out conspicuously. The buyers then could demand an explanation of why these properties are being left out or not considered! Thereafter, the buyers could make a better investment decision.

  • Oscar Chavez

    There are much more informative things to report on then a faulty ‘bubble watch’. We all know Socal is a destination location for a ton of people. Ultimately real estate is all about the location. If anyone is driving up values it would be the demand from the market of buyers. Rather then cause a panic I’d like to see more reports on trends and hot spots and up and coming, that’s much more interesting to talk and hear about.

  • Brent Stewart

    I generally do not trust Trulia’s stats. That being said, even if the market is slightly overvalued at the moment, we are still nowhere close to the pre-crisis highs of a few years ago, so I don’t think there’s anything to be worried about for the moment.