SoCal: Home of the Overvalued Market

We all know that California can be an expensive place to live, but would you consider it overpriced? According to Trulia, SoCal contains some of the most overvalued markets in the nation – places where housing costs far outpace the growth in income – an alarming fact to both homebuyers and the RE community.
rise in price
In the report, Trulia named 3 regions in Southern California among the top five overvalued market throughout the nation, and an additional two regions from California made their top ten list. Orange County ranked #1 in the country, followed closely by Los Angeles, Riverside-San Bernardino, San Jose and San Francisco respectively.

So what makes Southern California so overvalued? In the report, Trulia’s chief economist Jed Kolko stated, “Southern California has seen big price increases since the bottom without big increases in income.” In fact, nowhere else is this gap growing faster than Southern California, which is why Trulia ranked the three SoCal regions in among their top five.

Unfortunately, these price increases are only the tip of the iceberg with regards to housing affordability – the rising interest rates of 2013 and new mortgage rules have shut out many potential buyers, especially those who are not currently homeowners.

“There’s an affordability issue here,” said Stephanie Karol, U.S. economist at IHS Global Insight. “People who are not currently in a home they can sell are having a lot more trouble finding a house they can buy.”

While the situation isn’t ideal, things could definitely look worse for California’s RE community. “This is not the edge of a cliff,” said Kolko, and indeed the picture looks a lot better now than in years past. The large price gains of last year have slowed significantly in recent months – in part due to increasing interest rates and a reduction in investor activity – which will hopefully give the economy time to catch up with the housing market.

Do you think that California is the most overvalued state in the country? What are your thoughts?

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  • No. The buyers are all highly qualified, there is a ton of foreign investment, there has been a build of new buyers in the pool and very low inventory. Every house that I have sold on the west side of Los Angeles has had a ton of cash supporting the purchase and people don’t walk away from that sort of equity. People have too much skin in the game to let the foreclosure dramas happen again.

  • Teri Andrews-Murch

    I am seeing signs in the Sacramento/Sierra Foothills region too. Homes below 200K in my direct area of Auburn/Grass Valley have all but disappeared leaving many Buyers stilling wanting to buy but priced out, especially with the new FHA PMI. When I preview properties I am getting a sense of deja vu, complete REO fixers (blue tarp roof and all) priced over 200K, of course many of them are sitting there and eventually the price drops ever so slowly. I saw the same thing happening in 2006 with overpriced fixers and in my opinion these are going to be bought by people getting in over their heads and not having the funds to fix and a couple of years from now the property will be another REO.

    The housing affordability in California is disappearing again, it was nice when it was well over 50% so we have a nice flow of new buyers and move up sellers. For reference CAR data shows in 2006 affordability index for state was 12, by contrast 4th Q 2013 was 32

  • Patric Barry

    The market is driven by low interest rates, and the expectation that rates will rise. Buyers are seeking to buy with cheap money in the expectation that inflation will balance them over time.
    There’s a shortage of vacant land in prime areas, so buyers are bidding the market higher …..
    But the SoCal market has seen these cycles before, and when big runups in prices occur the price seem to plateau for a decade before they run again. We’ve seen a run up, but it see,s to not be over – but when it does peak, small adjustments may occur but there is NO expectation of a decline in values.

  • Randy Scott

    Here in the Temecula Valley market we have experienced some of the highest increases in value aside from Orange, San Diego and LA since the market fell apart. We have so much to offer here that people have been willing, investor to homeowner to pay more in cash to get the homes at the great prices they were. In some cases I have seen 35% plus jumps in value from only thirteen months ago. It makes some sense given the lack of inventory combined with foreign and local investor competition but I have seen the greed monster surface in sellers who want to continue to ride a similar wave of appreciation again year over year. Sadly when you tell people the truth there is another agent that will tell them what they want to hear and the market continues to be unstable. Being involved in real estate most of my life and a professional for over ten years I am always puzzled by the southern california cycle. It seems people just do not learn. We are going to arrive in the unaffordable zone faster than people will realize if things do not get a dose of balance soon. My hope is that the market and the agent professionals will guide people to a reasonable long term healthy growth pattern and that as the economic conditions and the mortgage industry continue to evolve we will be a supportive base for future growth for years to come.