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Bubble Watch: Are California home prices 5%-9% too high?

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

Buzz: California home prices are 5% to 9% too high based on the state’s economic strength, according to a Wall Street credit-rating agency.

Source: The latest report, based on 2020 third-quarter trends, comes from Fitch Ratings’ quarterly measurement of home prices vs. underlying business and real estate fundamentals.

The Trend

California was downgraded to “overvalued” after a 7.1% price gain in a year — an increase that was only No. 30 among the states. A year earlier, Fitch graded California’s market as “sustainable” (properly priced). Two years ago, the state got the same 5% to 9% overvalued grade.

The dissection

California’s rising housing risk is by no means alone or anywhere near the nation’s most overvalued market.

Fitch sees U.S. homes overall as 5.5% overvalued — the highest level of risk since 2008’s fourth quarter and up from 2% in 2019’s third quarter and 2.5% the previous year.

Joining California at 5% to 9% too high were Alabama, Arkansas, Colorado, the District of Columbia, Georgia, Indiana, Kentucky, Louisiana, Missouri, North Carolina, Nebraska, Ohio, South Dakota, Vermont, Wisconsin and Wyoming.

Fitch graded 13 states as even riskier.

10 to 14% overvalued? Florida, Hawaii, Kansas, North Dakota, Oregon, Rhode Island, Tennessee, Utah and Washington state.

15% to 19% overvalued? Arizona and Texas.

Between 25% and 34% overvalued? Nevada and Idaho.

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Quote

“Even though home price growth accelerated in 2020 due to low mortgage rates and demand/supply imbalance, the economy has not caught up,” the report states. “Personal income trended down to pre-COVID levels in the fourth quarter as stimulus and unemployment programs waned. Recovery slowed while unemployment remains elevated; income and unemployment levels in (the third quarter) were not supportive of long-term sustainable price growth.”

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FOUR BUBBLES for California and WHO KNOWS HOW MANY for Nevada and Idaho.

It’s good to know I’m not the only person who thinks recent price increases are beyond logical!

But as I frequently note, bubbles don’t have to burst — or burst quickly. Fitch sees upward momentum both for increased nationwide pricing (up 1% to 3% this year) and even larger overvaluations.

 


Source: Orange County Register

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