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.
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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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