Are San Diego or Inland Empire the riskiest real estate markets in Southern California? – Orange County Register

Real estate prices in Southern California may seem incredibly high, but two measures of their underlying values ​​suggest they’re not as crazy as elsewhere in the country.

Let’s be clear. These measures do not say that local homes are affordable. These calculations also do not allow us to conclude that what buyers pay is normal. Rather, these studies show that the overvaluation of Southern California homes relative to historical models is not massive on a national scale.

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

The other study was carried out by two professors from Florida Atlantic University. Their price dynamics model contrasted housing prices in 100 metropolises for March 2024 with long-term cost developments.

Wall Street thinking

Fitch found a local problem: San Diego.

According to these calculations, house prices, up 6.2% last year, would be 15 to 19% too high at the end of 2023. This is the second highest risk level in the ‘study.

Compare that to Los Angeles and Orange counties, where prices rose 4.9 percent last year. These 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.

Professorial thought

FAU professors considered Inland Empire homes to be the most overvalued in the region.

IE’s typical $579,000 home was 25% higher than its expected value in March 2024 — but that was only the 45th largest overvaluation out of 100 metros tracked nationally.

San Diego homes, worth $947,000, were 24 percent overvalued, according to that calculation — the No. 50 overvaluation nationally. And in Los Angeles-OC, with home prices of $947,000, the overvaluation was 14% – the No. 85 overvaluation nationally.

Conclusion

The discrepancies between the two dashboards are a perfect example of what I’ve been saying for a long time: creating any national ranking is both a statistical science and an art.

Just look at the most overvalued markets.

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

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

Or look at the different levels of overvaluations.

Fitch rated all U.S. homes as overvalued by 11%, and 44 of the 50 metros tracked were considered overvalued by 5% or more. The median overvaluation of FAU in the United States was more than double – 24%, with 97 out of 100 metros tracked overvalued by 5% or more.

Or look at two Bay Area markets.

Fitch considers San Francisco and San Jose as risky as San Diego – overvalued by 15% to 19%.

But FAU professors put San Jose 15th lowest (14% too high) and San Francisco third lowest (2% too high).

Quotable

Also consider the gap in national study perspectives.

Fitch wrote that it “expects nominal national house price growth to decelerate from 5.5% in 2023 to 0% to 3% in 2024, marking the slowest pace since 2019 This prediction is based on the interaction between several factors, such as affordability challenges. and limited housing supply, the latter being the most dominant factor in maintaining positive house price growth.

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

Jonathan Lansner is the Southern California News Group’s business columnist. He can be contacted at jlansner@scng.com