Thursday, December 16, 2004

State's (California) housing bubble is bound to burst

Modesto Bee

More evidence piles up that California's housing market is seriously out of whack.

An annual study published in Smart Money magazine's December issue shows that markets with overvalued homes are concentrated in California. The study looks at salaries, home prices, population trends and new-home construction and sets an "equilibrium price" on homes — what a house should cost in an area — then compares it to actual home prices. When salaries and home prices are roughly in line, the market is fairly valued. When they are out of line, the market is overvalued or undervalued.

Seventeen California markets ranged from 25 percent overvalued in Bakersfield to 59 percent overvalued in Orange County — the most overvalued market in the country.

The study put the actual value of a median-priced home in Modesto at $250,600, or 54 percent overvalued in the second quarter of 2004. It's gotten much worse since then.

In Sacramento, the price was $298,400, or 50 percent overvalued. In the Stockton-Lodi market it was $274,800 and Vallejo-Fairfield $348,100, both 51 percent overvalued. Fresno, at $225,500, was only 47 percent overvalued.

On top of this comes the House Price Index released by the Office of Federal Housing Enterprise Oversight. The largest increases in home prices from September 2003 to September of this year were, not surprisingly, concentrated in California. The California average increase was 27.18 percent; the national average was 12.97 percent. This increase is particularly stark considering that the price of nonhousing goods and services as measured by the Consumer Price Index grew 2.68 percent.

What all this means for the ordinary person is that housing prices in California are rising at vastly higher rates than incomes. But people are still buying, which means a lot of people are paying more than they really can afford, considering their incomes. Obviously, something's got to give. The only questions are when, and with what effect.

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