“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: Half of California’s 26 metropolitan areas have home values estimated to be at least 10% overvalued.
Source: My trusty spreadsheet reviewed estimates of home-price valuations by Wall Street credit watcher Fitch Ratings. It compared house values with various local business and real estate factors, including rents for 2022’s first quarter, to gauge if the underlying economic trends support house prices.
Topline
Overvalued housing is not some California bad habit. The 2020-21 rush to buy exploded prices past reality across the nation, too.
U.S. prices are up 30% since the end of 2019, according to a price index from the Federal Housing Finance Agency. California prices rose 31% in the same period.
In the first quarter, 217 of 381 U.S. metros tracked — that’s 57% — were 10% or more overvalued. In 2021, it was 79 metros or just 21%. And at the start of 2020, just before the pandemic upended the economy, just five metros — or 1% — were priced 10% or more too high.
California slice
Here’s how Fitch ranked 26 California metros for overvaluation, starting with the 10%-plus group…
No. 1: San Diego and San Francisco at 22%.
No. 3: San Jose at 16%.
No. 4: Sacramento, Santa Barbara, and Visalia-Porterville at 15%.
No. 7 Ventura County at 14%.
No. 8: Yuba City, Bakersfield, Merced, San Luis Obispo and-Paso Robles-Arroyo Grande and Modesto at 13%.
No. 13: Los Angeles-Long Beach-Anaheim at 10%.
Below 10% …
No. 14: Riverside and San Bernardino counties plus Salinas at 9%.
No. 16: Fresno and Stockton at 8%.
No. 18: Madera, Vallejo-Fairfield and Santa Cruz-Watsonville at 7%.
No. 21: Redding at 6%.
No. 22: Hanford-Corcoran at 4%.
And not overvalued were Chico, El Centro, Napa and Santa Rosa.
Quotable
“National home prices will likely experience some corrections as a result of the worsening affordability in the second half of the year. Despite that, Fitch deems a housing market crash akin to the Great Financial Crisis highly unlikely, as housing inventory is still constrained, and existing homeowners who have locked in low mortgage rates are unlikely to sell their properties,” the report said.
How bubbly?
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FOUR BUBBLES!
It’s no shock that an analysis of home prices would conclude buyers went too far in their rush to acquire larger living spaces in the pandemic era.
Fitch calculated the average U.S. metro area’s home prices were 11% too high in the first quarter. That seems bubblish to me.
The 2022 slowdown in homebuying certainly suggests that house hunters have noticed the overzealous pricing — not to mention skyrocketing mortgage rates. Many shoppers have ended or delayed their house hunt.
Look, “overvaluations” don’t have to be fixed with significant price drops. Other factors — large income growth, steep rent hikes or few sellers, are examples — can keep valuations up. And an extended period of little or no appreciation can help take the air out of a bubble.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
