Are San Diego or Inland Empire the riskiest real estate markets in Southern California?

Home prices in Southern California may seem incredibly high, but two criteria for their underlying values ​​suggest they are not as crazy as in other parts of the country.

Let’s be clear. These measurements do not say that local housing is affordable. These calculations also do not conclude that what buyers pay is normal. Rather, these studies show that the overvaluation of Southern California homes compared to historical patterns is not massive on a national scale.

The first study is from Fitch Ratings, a Wall Street credit quality monitoring company. It compared price patterns in 50 U.S. metropolitan areas at the end of 2023 to key economic factors such as employment, interest rates and rents.

The other review is from two professors at Florida Atlantic University. Their price momentum model contrasted 100-metre home prices by March 2024 with how costs turned over the long term.

Wall Street Thinking

Fitch found a local trouble spot: San Diego.

Based on these calculations, their home prices, which rose 6.2 percent last year, were estimated to be 15 to 19 percent too high by the end of 2023. That’s the second-highest level of risk in the study.

This contrasts with Los Angeles and Orange counties, where prices increased 4.9 percent last year. Those homes were overvalued by 5 to 9 percent at the end of the year, the same risk score as the Inland Empire, where prices rose 2.1 percent last year.

Teacher thinking

FAU professors ranked Inland Empire homes as the most overpriced in the region.

The typical IE home, at $579,000, was 25 percent above its expected value in March 2024, but that was only the 45th largest 100-meter overvaluation tracked nationally.

Homes in San Diego, valued at $947,000, were 24 percent too high, according to these calculations—the 50th overvaluation nationally. And in LA-OC, with home prices of $947,000, the overvaluation was 14 percent – ​​the 85th overvaluation nationally.

Bottom line

The gaps between the two scorecards are a perfect example of what I’ve long said: Creating any national rankings is part statistical science and part art.

Just look at the most overvalued markets.

Fitch found that seven metropolitan areas were overvalued by 20 to 24 percent: Memphis, Tennessee, Raleigh, North Carolina, Indianapolis, Indiana, Milwaukee, Wisconsin, Nashville, Tennessee, Buffalo, New York, and Birmingham, Alabama.

FAU’s top seven were: Atlanta (41 percent too high), Detroit (40 percent), Cape Coral, Florida (39 percent), Tampa and Las Vegas at 38 percent, then Knoxville, Tennessee, and Palm Bay , Florida. to 37 percent.

Or let’s look at the different levels of overvaluation.

Fitch rated all U.S. homes as overvalued by 11%, and 44 of the 50 metropolitan areas it analyzed were considered overvalued by 5 percent or more. FAU’s median overvaluation in the United States was more than double that: 24 percent, with 97 of 100 metro areas tracked overvalued by 5 percent or more.

Or look at two Bay Area markets.

Fitch considers both San Francisco and San Jose to be as risky as San Diego: 15 to 19 percent overvalued.

But FAU professors have San Jose at the 15th lowest risk (14 percent too high) and San Francisco at the third smallest (2 percent too high).

Quotable

Let us also consider the deviation in the national perspectives of the studies.

Fitch wrote that it “expects nominal national house price growth to slow from 5.5 percent in 2023 to 0 percent to 3 percent in 2024, marking the slowest pace since 2019. This forecast is based on the interaction between multiple factors, such as affordability challenges. and a short supply of housing, the latter being the most dominant factor in sustaining positive growth in house prices.”

FAU professor Ken Johnson wrote: “House prices have deviated so far from their long-term trends that the risk of a correction is increasing. “While prices are unlikely to fall dramatically, price performance could remain stable in the future, or even home prices could see a slight decline.”

Jonathan Lansner is a business columnist for the Southern California News Group. He can be contacted at [email protected]