Real Estate Bubble in SOCAL? Not Likely

The chance of a widespread drop in local or statewide home prices in the next two years is practically nil, according to a new forecast from a private mortgage insurer.

Arch MI’s quarterly housing reports pegs the risk of a price drop based on a host of real estate trends, credit market factors and economic patterns. Recent economic turbulence has raised questions about the durability of housing’s rebound from its collapse and the Great Recession.

Based on first-quarter data, Arch calculated the risk of price drops in all of California – as well as in Orange, Los Angeles, Riverside or San Bernardino counties – at a “minimal” 2 percent vs. 5 percent nationwide. A year ago, California’s price-drop risk was 8 percent, equal to the national risk level in 2015’s first quarter.

“We see no housing bubble in Southern California,” says Ralph DeFranco, chief economist for Arch MI’s owner, Arch Capital. “Even though homes feel expensive, they are supported by the amount of income people have.”

Here’s how Arch sees the region:

In Orange County, risk of a price decline was 2 percent in the first quarter, down from 8 percent a year ago and its historically high risk of 27 percent dating to 1980.

Price momentum is solid, with O.C. home values up 6.3 percent in the 12 months ended in the first quarter vs. 4.8 percent in the previous year. By Arch’s estimates, Orange County homes were 3 percent overvalued in the first quarter compared with its economic fundamentals. At the last decade’s bubble peak, Orange County homes were 40 percent overvalued.

Those price gains came despite continued problems with financial affordability among buyers. Arch’s math shows O.C. house hunters in the first quarter had 30 percent less buying power than the average national shopper. O.C. affordability ran 17 percent below its historical trend vs. national averages.

Arch’s estimated 2 percent chance of housing depreciation in Los Angeles County was down from 5 percent a year ago and the county’s historical risk of 28 percent since 1980. L.A. County home prices rose 7.7 percent in the past year vs. 6.5 percent in the previous year. Arch saw L.A. homes as 4 percent undervalued in the first quarter vs. 50 percent overvalued in the previous decade’s buying frenzy.

L.A.’s market strength comes despite affordability 24 percent below the national average at the start of 2016, and 13 percent lower than historic affordability dating to 1980.

The Inland Empire’s 2 percent price-drop risk was down from 4 percent a year ago and below its historical average risk level of 28 percent.

Home prices in the Inland Empire rose 6.7 percent in the last year vs. 6.4 percent in the previous year. Arch saw Inland homes 2 percent undervalued in the first quarter vs. 60 percent overvalued in 2006.

The Inland Empire’s first-quarter affordability was 21 percent less than the national average and 12 percent under its historical levels.

Don’t think Arch is easy on real estate.

Its economists see plenty of risk in states with energy-dependent economies. North Dakota, with a 52 percent risk of price drops, is in the most precarious shape, followed by “elevated” risk in Wyoming (46 percent chance of a drop) and West Virginia (35 percent).

Arch found “moderate” risk in Alaska, New Mexico, Louisiana, Oklahoma and Texas – home to five of the seven diciest metro areas including Houston (national worst at 39 percent chance of price drop) and Fort Worth (16 percent chance).

“The risk of future price declines over the next two years is limited to mining and drilling areas hardest-hit by lower energy prices. Of course, for the nation as a whole, cheaper energy is a strong positive,” Arch’s report states. “Apart from some weakness in several energy-extraction states, home prices should rise faster than inflation over the next few years due to strong fundamentals.”