Bubble Watch: Appraisers see overinflated home prices in Southern California

“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: A novel home valuation index hints that buyers are overpaying for homes as it finds local appreciation is far smaller than eye-catching gains in median prices.

Source: Real Estate Research Council of Southern California

The Trend

Southern California home values were appreciating at a 4.8% annual rate in October, according to a study of existing single-family homes in seven counties done by local appraisers.

Compare that with the 12-month surge in median sales prices in six local counties in the same period — up 17.1%, according to data tracker CoreLogic, and up 16.1%, by the math of the California Association of Realtors. These two measurements track six counties with Santa Barbara being the outlier.

The Dissection

Since 1943, the research council has produced one of local housing’s most curious metrics. The group based at Cal Poly Pomona tracks local home values twice a year with volunteer appraisers re-evaluating the same 308 single-family homes across Southern California.

While the council uses a small sample, the consistency of the targeted homes eliminates one flaw in other transaction-based valuation benchmarks such as medians — the changing mix of homes that are selling. Don’t forget what appraisers think can swing a market because their valuations are a key part of the mortgage-making process.

So when the human eyeballs see far less appreciation than what buyers and sellers agree to on price, it’s certainly a warning sign of an overheated market.

Such variances were by no means this large a year ago before mortgage rates fell to historic lows and the pandemic’s nudge rushed folks to buy in a supply-starved market. This appraisers’ index in October 2019 showed values up 2.8% in a year vs. a median price gain of 4.2%, according to CoreLogic and a 5.6% gain calculated by CAR.

Let’s look at the valuation gap in the four counties covered by the Southern California News Group …

Los Angeles County: Up 5.1% in the year ended in October, according to the appraisers’ index vs. median prices from CoreLogic up 19.5%, and the Realtors’ 12.4% gain.

Orange County: Up 4.3% (appraisers) vs. 13% (CoreLogic) and 13.4% (Realtors).

Riverside County: Up 5.4% (appraisers) vs. 13.9% (CoreLogic) and 15.5% (Realtors).

San Bernardino County: Up 5.2% (appraisers) vs. 15.4% (CoreLogic) and 14.4% (Realtors).

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … a rare FIVE BUBBLES!

The homebuying system relies on appraisers being conservative, so you can expect some of this valuation gap to stem from their natural skepticism. Those doubts can throw curveballs into closings for mortgage-financed purchases.

Plus, there’s no doubt that this year’s odd market — with a dramatic shortage of “affordable” homes and buying enthusiasm from well-heeled house hunters — has distorted median selling prices upward with more transactions involving pricier homes.

But how many more overly eager buyers like that exist?

And cheap money isn’t forever. There should be many questions being asked about the durability of the current buying frenzy after the pandemic-battered economy heals.

Source: Orange County Register