Southern California property values have sunk below historic norms, various indexes show, but ongoing foreclosures and economic woes mean that the market bottom may not yet have been reached.
The forecasting firm IHS Global Insight reported this week that Los Angeles County home prices are now 6% undervalued. Its calculations are based on home prices, interest rates, area incomes, population density, and historic premiums and discounts in given markets.
By those measures, the firm said, Orange County is 11% undervalued and the Inland Empire is 16% undervalued. Even further below the historic norm are San Diego, at 21% undervalued, and San Francisco, which is 25% below normal, IHS said.
"If you get away from the coasts, houses are cheap," said Richard Green, director of USC's Lusk Center for Real Estate. Homes in many inland area are bargains relative to incomes and rents; some houses are selling for less than construction costs, Green said.
But problems beyond the housing market could thwart local real estate's recovery. California's inability to solve its budget woes is "so awful," Green said, "that it could create problems for business formation, which makes me really wonder about the prospects of job growth going forward."
California's unemployment rate was 11% in April, according to the California Employment Development Department, the fifth-highest rate in the nation.
IHS also qualified its findings, saying that "it is too early to call a bottoming," as "job losses continue, housing inventories remain elevated and consumers remain wary in light of economic uncertainty."
The IHS report came two weeks after a National Assn. of Home Builders index of purchasing ability hit the highest level in its 18-year history. The NAHB/Wells Fargo housing opportunity index showed that 73% of homes sold in the first quarter of this year were affordable to families earning the national median income of $64,000.
In Los Angeles County, 42% of homes sold in the first quarter were affordable to a median-income family, up from a recent low of 2% in the first quarter of 2006, the index showed. Orange County's home prices for the first quarter made 48% of homes sold affordable to a median-income family there, up from 3% in the fourth quarter of 2005.
The comparable first-quarter affordability index figure for the Inland Empire was 73%, up from 7% in mid-2006. San Diego County's index rose to 60% in the first quarter, compared with 4% in late 2005, and Ventura County's 61% affordability index was up from 8% in mid-2006.
The housing market still must clear a backlog of foreclosed homes and faces more than 100,000 potential foreclosures. In the first quarter, 135,431 mortgage defaults -- the first stage in the foreclosure process -- were recorded in California, MDA DataQuick said. Foreclosed properties are typically sold at deep discounts by lenders who need to get the properties off their books, dragging all prices down.
Low mortgage interest rates have also fueled many recent purchases. But the sub-5% loan rates so common in recent months may be history. The Mortgage Bankers Assn. reported that the average 30-year fixed-rate mortgage for the week ended May 29 was 5.25%, up from 4.81% the week before.