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Inland Housing Market ‘Overvalued’?

You may have seen today’s Press Enterprise article headlined Inland Housing Called ‘Overvalued’, quoting a recent report from CoreLogic which categorized various housing markets across the country as either ‘normal’, ‘undervalued’ or ‘overvalued’. Now I routinely peruse CoreLogic reports and generally find them to be quite helpful, but for the life of me I can’t figure this one out. Bloated markets like Santa Barbara, the Bay Area, Silicon Valley and Orange County, which have surpassed their previous high water mark and are some of the least affordable housing markets in the state, are rated as ‘normal’, while Inland areas, including some of the most affordable real estate left in the state, are deemed ‘overvalued’ and have been for the past decade.

According to their website, “CoreLogic HPI Forecasts™ are based on a two-stage, error-correction econometric model that combines the equilibrium home price—as a function of real disposable income per capita—with short run fluctuations caused by market momentum, mean-reversion, and exogenous economic shocks like changes in the unemployment rate.”

The Gene Wunderlich Realtor® Report uses a much simpler methodology. Are we selling houses? Did we sell more or less than last month / last year? Are prices rising or falling? Does it look sustainable? Of course people pay good money for an exogenous econometric mean-reversion equilibrium model and you’re getting this for free. Probably worth every penny. So, don’t despair. CoreLogic has considered our region ‘overvalued’ since 2006 and forecasts that we will continue to be overvalued until at least 2022. I would argue that the entire state is ‘overvalued’ and that there is nothing remotely ‘normal’ about anything here, but I digress. At least we’re consistent and it’s hard to ‘overvalue’ the quality of life we enjoy here. Have you smelled San Francisco lately?

So, to the business at hand. Housing sales continued their decline heading to year-end. That’s neither unusual nor unanticipated. Despite being down 18% from August sales and 33% from our June peak (1,360 / 902), single family unit sales across the region remain 3% ahead year-over-year (8,721 / 9,013). That’s not a big cushion and we’re still going to need a decent 4th quarter to finish this year ahead of last. Given that pending sales are down from last month as well, October sales are not likely to save the year. We’re going to need every sale that we can muster in our customary December rally.

Median price remains strong. September’s median dropped slightly from August ($353,985 / $353,155) but was still up 5% over last September. Year to date we’re keeping that 7% edge over 2016 ($324,695/ $348,025). We’ve maintained that appreciation rate of 5% – 7% for the past five years and that’s a good thing. Barring any unusual exogenous factors, that’s a sustainable appreciation rate as our market expands to meet the expected influx of 1,000,000 new residents over the next decade. If our market was appreciating at 30+% annually like we did 2001-2006, I would be in complete agreement with CoreLogic that we were ‘overvalued’. Given our current circumstances, I have to disagree. Our market is appreciating, it is sustainable and it remains affordable relative to our surrounding markets. As with the rest of the state, we just need to build more homes.

Temecula has posted five consecutive months with an average sale price in excess of $500,000 harking back to those heady days in 2006 which we thought would never end. They did. And this upward trend will likewise run its course in due time. But that time is not yet, nor is it on the radar of any but the most bearish prognosticators, barring exogenous factors. (I like that word).

Supply = solution. Build more homes.

Written by Gene Wunderlich, Sr. Staff Writer

Prior to his retirement in 2021, Wunderlich served on a number of local non-profits and boards. He spent the past decade as a legislative advocate for the housing and real estate industries as well as a coalition of local Chambers of Commerce advocating on behalf of small and local businesses.

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