Our home values have been detached from “key economic factors” for years. More interesting would be studies that analyze what would happen to areas that are full of the older tract homes (1980s and before) that haven’t been improved much and are dumped onto the market for sale by money-grabbing heirs who just want fast cash. There could be a pricing downdraft of 10% to 15% in very short time – like a month or two.
Southern California home prices may seem insanely high, but two yardsticks of their underlying values suggest they’re not as crazy as elsewhere in the nation.
Let’s be clear. These measurements don’t say local homes are affordable. Nor does this math conclude what buyers are paying is normal. Rather, these studies show the overvaluation of Southern California homes compared with historical patterns is not massive on a national scale.
The first study is from Fitch Ratings, a Wall Street credit-quality tracking company. It compared pricing patterns in 50 U.S. metropolitan areas at year-end 2023 with key economic factors such as employment, interest rates and rents.
The other review is by two professors from Florida Atlantic University. Their price momentum model contrasted home prices in 100 metros for March 2024 with how costs gyrated over the long haul.
Fitch found one local problem spot: San Diego.
Its home prices, up 6.2 percent last year, were calculated to be 15 percent to 19 percent too high at 2023’s end, by this math. That’s the second-highest level of risk in the study.
Contrast that to Los Angeles and Orange counties, where prices rose 4.9 percent last year. Those homes were 5 percent to 9 percent overvalued at year’s end — the same risk score as the Inland Empire, where prices rose 2.1 percent last year.
The FAU professors pegged Inland Empire homes as the region’s most overvalued. The IE’s $579,000 typical house was 25 percent above its expected value in March 2024 — but that was only the 45th-largest overvaluation of 100 metros tracked nationally.
Homes in San Diego, worth $947,000, were 24 percent too high, by this math — the No. 50 overvaluation nationally. And in L.A.-O.C., with home prices running $947,000, overvaluation was 14 percent — the No. 85 overvaluation nationally.
Bottom line
The gaps between the two scorecards are a perfect example of what I’ve long said: The creation of any national ranking is part statistical science and part art. Just eyeball the most overvalued markets.
Fitch found seven metros were 20 percent to 24 percent overvalued: Memphis, Tenn.; Raleigh, N.C.; Indianapolis; Milwaukee; Nashville, Tenn.; Buffalo, N.Y.; and Birmingham, Ala. FAU’s top seven were: Atlanta (41 percent too high); Detroit (40 percent); Cape Coral, Fla. (39 percent); Tampa, Fla.; and Las Vegas at 38 percent, then Knoxville, Tenn., and Palm Bay, Fla., at 37 percent.
Or look at the differing levels of overvaluations.
Fitch graded all U.S. homes as 11% overvalued, with 44 of the 50 metros it tracked seen as overvalued by 5 percent or more. FAU’s median U.S. overvaluation was more than double — 24 percent with 97 of 100 metros tracked overvalued by 5 percent or more.
Or look at two Bay Area markets.
Fitch sees both San Francisco and San Jose as risky as San Diego — 15 percent to 19 percent overvalued.
But FAU professors have San Jose with their 15th-lowest risk (14 percent too high) and San Francisco with the third-smallest (2 percent too high).
Quotable
Contemplate the deviation in the national outlooks of the studies, too.
Fitch wrote that it “expects nominal national home price growth to decelerate from 5.5 percent in 2023 to 0 percent to 3 percent in 2024, which signifies the slowest pace since 2019. This forecast is based on the interplay between multiple factors, such as affordability challenges and a tight supply of homes, with the latter the more dominant factor in sustaining positive home price growth.”
FAU professor Ken Johnson wrote: “Home prices have become so out of line from their long-term trends that the risk of correction is rising. While it’s unlikely prices will plummet dramatically, price performance could go flat for the future, or home prices could see a slight decline even.”
Lansner is the business columnist for the Southern California News Group.
