“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: California home prices were 10% to 14% too high in the spring, by one Wall Street analysis.
Source: Fitch Ratings’ quarterly review of housing valuations looks at prices paid and how they compare with underlying real estate and economic fundamentals.
California values in spring 2020 were seen by Fitch as “sustainable” and less than 5% overvalued. A 20% price surge in a year is a key reason for the elevated risk warning.
While a desire for more living space is pushing some housing demand in the pandemic era, the Federal Reserve’s meddling in bond markets — maintaining historically cheap mortgages below 3% despite rising inflation — is heavily distorting asset values like housing.
California’s overpriced homes are by no means a rarity.
Nationally, 11.7% of all homes had prices above economic fundamentals in the second quarter with 43 states overvalued. In the spring of 2020, as the pandemic was starting to smack the economy, just 13 had prices seen as out of whack.
There were 13 other places with overvaluation leaps similar to California at 10%-to-14% too high from sustainable: Arkansas, Colorado, the District of Columbia, Florida, Massachusetts, Minnesota, New Jersey, New Mexico, New York, North Carolina, Ohio, South Carolina and Vermont.
And three states — Nevada, Oregon and Washington — went from sustainable to overvalued by 15% to 19%.
Idaho was again seen as the most overvalued state at 30% to 34% too high in the second quarter vs. 20% to 24% a year ago. See what a rush of ex-Golden Staters can do!
The spring’s lone “sustainable” housing markets, by Fitch’s math, were in Alaska, Iowa, Illinois, Louisiana, Mississippi, North Dakota, West Virginia and Wyoming.
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … California and much of the nation get THREE BUBBLES! For places like Idaho? SIX BUBBLES!
Despite what real estate salespeople and their gurus may say, this is not a no-risk housing market. It’s all-but-guaranteed that appreciation will chill when “affordability” shrinks demand.
How soon that occurs and by how much are big questions. How buyers and sellers react to the cooler climate is another large unknown.
“The rapid price growth of the past two years is unsustainable given underlying fundamentals …,” Fitch says.”If the 30-year mortgage rate increases to 4%, the ratio of mortgage payments to monthly income could rise to 19% — assuming home prices and monthly income remain constant at 2021’s levels. This would represent a record high since the financial crisis and a challenge for home price growth.”
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at firstname.lastname@example.org
Source: Orange County Register