Some Areas Appear Modestly “Overvalued” Relative to Incomes

Southern California’s housing market closed 2016 with the highest median sale price in nine years, continued steady price growth, slightly higher full-year sales than in 2015, record luxury sales, and lower levels of investor purchases and distressed sales. But inventory remained tight, exacerbating the affordability crunch, and there were stronger signs of a disconnect between home prices and incomes in some parts of the region.

The median price paid for a home in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties combined in December 2016 was $470,000, up 6.8 percent year over year and the highest since the median was $500,000 in August 2007. For the past two years, the annual gains in both the region’s median sale price and CoreLogic’s Home Price Index (Figure 1), calculated by county, have been fairly steady in the 5 percent to 7 percent range.

CoreLogic calculates a long-term sustainable home price level based on the historical relationship between its Home Price Index (HPI) and a region’s per-capita disposable income (both HPI and income are inflation-adjusted). A market is loosely considered “overvalued” if current prices exceed the long-term sustainable level by 10 percent or more. Three Southern California metro areas – encompassing Riverside, San Bernardino, Los Angeles and Orange counties – have met the “overvalued” threshold, although just barely (Figure 2). The other three counties are considered “normal” because prices are either below the long-term sustainable level or less than 10 percent above. Overvalued markets could eventually experience price stagnation or declines as incomes catch up. Two large threats are rising rates and tight inventory. Rising rates could diminish demand at the margin and tight inventory will likely keep prices elevated.

As Figure 2 shows, all six counties were far more overvalued – from 40 to 83 percent – during the last housing boom. Among the other major differences between today’s market and the run-up to the last housing bust: Flipping, a measure of speculation that shows the share of homes sold twice within nine months, has trended lower. Last December, 5.1 percent of homes sold in the region had been flipped, down from 5.6 percent a year earlier and down from a decade-high 9.3 percent in February 2013. Current underwriting remains far more conservative, subprime and other high-risk loans are now rare, and use of low-down-payment purchase loans remains far below peak levels. In December 2016, home purchases with a down payment of 3.5 percent or less accounted for 26.5 percent of purchase loans, compared with a high of 51.6 percent in November 2006. Mortgage performance remains relatively good, with 1.3 percent of outstanding mortgages 90 or more days past due in December 2016 – the lowest level since July 2007.

Looking ahead, the housing market’s performance will depend on a variety of factors including mortgage rates, job and income growth and decisions made in Washington D.C. relative to taxes, trade, regulations and infrastructure spending. Southern California continued to experience year-over-year job growth in December 2016 (Figure 3), although the gain was lower than a year earlier. Riverside County’s 2.9 percent year-over-year increase in non-farm employment in December 2016 ranked 9th among the nation’s top 100 metro areas by population, according to the Bureau of Labor Statistics.

Other 2016 Southern California housing market highlights:

• Full-year 2016 home sales totaled 244,313, up 2.1 percent from 2015. Resales in 2016 increased 1.2 percent, while new-home sales rose nearly 14 percent to the highest level since 2008.
• The December 2016 inventory of homes for sale was 10.6 percent lower than a year earlier.
• A record 25,645 homes sold for $1 million or more in 2016, up 10.0 percent from 2015, while a record 6,517 sold for $2 million or more, up 8.4 percent.
• Reflecting a sharp rise in mortgage rates late in 2016, the typical mortgage payment (explained in Figure 4) buyers committed to in December 2016 was $1,839, up 9.9 percent year over year. Adjusted for inflation, the December payment was 36.7 percent below the peak in July 2007.
• Distressed sales – REO and short sales – accounted for 5.8 percent of 2016 sales, down from 7.7 percent in 2015 and the lowest since 2006. The peak was 54.6 percent in 2009.
• Absentee buyers – investors and vacation-home buyers – purchased 20.9 percent of all homes sold in 2016 – the lowest since 2009 and down from a 30-year high of 28.4 percent in 2013.

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