Are California Home Prices Ready for a Correction?

California housing looks overvalued with overall price appreciation exceeding the market’s economic foundation, according to one new analysis.
But the chance that housing losses will occur in the state is minimal, says another industry report.
Credit-rating agency Fitch’s is far more antsy about the state’s housing values than what mortgage insurer Arch MI found in its recent housing-risk study. But both reviews, comparing house-price trends with underlying economic patterns, showed other parts of the nation with dicier real estate than California.
Fitch found the typical U.S. home was 3 percent overvalued in the fourth quarter with 17 percent of all housing 10 percent or more too pricey.
“Fast home-price growth in some regions — California, Florida and Texas — appears to be exceeding the supporting economic fundamentals,” Fitch wrote.
California is one of nine states with housing that’s overvalued by 5-9 percent. The others: Colorado, Florida, Louisiana, South Dakota, Utah, Washington, Wisconsin and Wyoming.
Yet four states are slightly more overvalued than California by 10-14 percent: Arizona, Hawaii, Oregon and Texas. And the most-overvalued states, with housing 15-19 percent too pricey, by Fitch’s calculations? Idaho, North Dakota and Nevada.
Arch MI, using third quarter 2017 data, sees California with only a “minimal” 3 percent risk of home prices falling in the next two years. These analysts found 18 state markets were more vulnerable with a 5 percent chance of nationwide depreciation.
Alaska, North Dakota and Wyoming had the biggest chances of price declines, between 31-37 percent. Six states were between 11-25 percent: Connecticut, Louisiana, New Mexico, Oklahoma, Texas and West Virginia. And another nine state had “minimal” but higher risks than California.
Regionally, Fitch studied 20 major U.S. markets and found the region of Los Angeles and Orange counties “overvalued” by 5-9 percent in the fourth quarter, unchanged vs. the end of 2016. Overvalued by 15-19 percent was Dallas-Fort Worth; Las Vegas and Portland. Overvalued by 10-14 percent was Phoenix.
Arch Mi found Orange County to be Southern California’s riskiest housing market but with only a “minimal” 8 percent chance of price declines in two years. Los Angeles County and the Inland Empire were rated as having a 2 percent chance of declines.
The riskiest market among the nation’s 50 largest tracked by Arch Mi was Houston with a 32 percent chance of price declines. Then came 20 markets with “low” risk, 11-25 percent chance of loss.
“It’s premature to worry about a housing bubble,” Arch MI analysts stated in their report. “The typical warning signs – excessive debt levels, poor-quality loans, exponentially increasing home prices, rising vacancy rates and/or poor affordability compared to the past, and a high number of internet searches on house flipping – are not present.”