Since the housing market crash, many Americans have understandably become much more cautious and observant of real estate trends. In 2006, the average home was overvalued by 39%, and in just 5 years that number plummeted to the point where homes were shown to be undervalued by 15%. While home prices have shown a nationwide upward trend since then, the average home remains undervalued. However, some states – like California – have seen dramatic increases in property values; in recent years Orange County seems to have some of the highest priced real estate in the country.
According to the real estate website Trulia, California holds 8 of the 10 most overvalued housing markets – 5 in Southern California and 3 in the Bay Area. Orange County is chief among them with home prices valued at 17% above fundamental value, which is determined based on supply, demand and realistic expectations about the future. Low housing inventory has certainly helped drive that number higher.
According to the California Association of Realtors the median home price in March of 2014 in Orange County was $677,000. That number is up 11.6% at this time last year. Juxtapose this figure with the percentage of people who can afford a median price home – 34% last year, down to just 20% this year.
So, are we seeing a bubble form over Orange County? Maybe. Maybe not. Jed Kolko writes the Bubble Watch segment for the aforementioned Trulia. And as he points out, “Bubbles are notoriously difficult to predict and hard to confirm until after they’ve burst: it’s impossible to be sure whether price gains are justified by fundamentals until, if and when, a bubble bursts.” He goes on to point out that while these numbers may seem alarmingly high, they may also be justified by outside factors like housing shortage or great weather (two things we know to be common to Orange County) or job growth or high household incomes.
Kolko also makes it clear that while areas like Orange County are showing these steep numbers today, this is nowhere near what we saw in the mid-2000s where home prices in the OC were as much as 71% overvalued. “We’d be at greater risk of heading toward a bubble if price gains were still accelerating, but they’re not,” Kolko wrote. “Furthermore, the market is neither overbuilding nor over-lending. On all these measures, the housing market today looks little like the bubble last decade.”
Anthony Randazzo of the Orange County Register has a different take. After reviewing the data and reading Kolko’s piece, he drew a simpler conclusion – “If the data looks like a bubble and acts like the last bubble, it's probably a bubble.” He urges Orange County buyers and homeowners to consider the recent housing market crash before buying the real estate recovery hype. Probably good advice for any market showing data this far from the norm, but by the same token I believe the saying goes “nothing ventured, nothing gained.” Whatever your philosophy, it never hurts to do your research and weigh your options – particularly in an environment this ambiguous.