Bubble Watch: How Home Prices Jumped 8.8% To 30.4%

May 7—"Bubble Watch" digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: Southern California home-price appreciation, on a county level, ran between 8.8% and 30.4% in this wild pandemic year.

Sources: Too many, perhaps. See below.

The Trend

Generally speaking, local home prices are fairly crazy. If you want a more definitive answer, you have to sort through a collection of price indexes tracking appreciation rates using varying mathematics to follow assorted slices of the market for different geographies. Got it?

The dissection

My colleague Jeff Collins and I wish there was a "perfect" home-price index. Since there isn't, we're stuck painting market pictures with a collection of statistical brushes.

Let's start off honestly: There's plenty of artful interpretations within the science of tracking home prices.

The backbone of these indexes is sales data gleaned from closed transactions that are among the public record. But it takes a keen eye, or a smart computer program, to separate arms-length transactions from non-sales — property movement among family, friends or curious legal entities.

Once the art is done, the statistical fun begins.

DQNews/CoreLogic: The region's venerable data tracker curates monthly median sales prices dating back to 1988.

This median is the mid-point value of all closed transactions for virtually all residences — existing and new homes, single-family, townhomes and condos. CoreLogic's report is the widest accounting of home pricing.

For March, it showed annual appreciation rates ranging from 18.3% in San Bernardino County to 17.9% in Riverside County, 17.2% in LA County and 10.6% in Orange County.

California Association of Realtors: The association produces another median sales price that's a good measure of the "resale" market for older or "existing" homes that are roughly 90% of the market.

Note that this index tracks only sales prices of closed deals for single-family homes that are sold by CAR members through multiple-listing services. It covers most, but not all, transactions.

Realtor stats found March's appreciation running from 30.4% in San Bernardino to 23% in Riverside, 17.7% in Los Angeles and 16.2% in Orange County.

The problem with any median as a price tracking tool is that it can be swayed by changes in what's selling. For example, the lack of smaller, more affordable homes for sale in the pandemic era may have caused measures like the median — or, especially, average prices — to skew appreciation upward.

One bit of statistical work tries to minimize that distortion. "Repeat sales" indexes look at gains or losses on the same property. But that means transactions without a sales history, notably new homes, are left out.

Case-Shiller: The best-known repeat-sales metric is named after two pioneering real estate professors who popularized this quirky calculation. Appreciation follows these sales tallies for 20 U.S. metropolitan areas, including Los Angeles and Orange counties.

One drawback is that this reporting is relatively slow. The last L.A.-O.C. appreciation rate — for February — was 11.9%.

CoreLogic: A quicker version of the "repeat sales" measurement is done by CoreLogic, which also happens to own the Case-Shiller math. This metric also includes sales of some townhomes in its tracking of single-family homes.

For March, this home-price index showed appreciation running at 15.6% in the Inland Empire, 10.2% in Orange County and 8.8% in Los Angeles County.

Freddie Mac: Yet another repeat-sales price index from the giant mortgage buyer looks at sales data plus valuations taken from refinancing loan approvals.

However, Freddie Mac studies only deals financed with the more "affordable" mortgages it buys with its sister agency, Fannie Mae. So the indexes don't include much of the luxury market.

As of March, this math put appreciation at 18.6% in the Inland Empire and 12% in L.A.-O.C.

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Another view

Think of the stock market. Which index tells its pandemic story best?

The old-school Dow Jones 30-stock index (up 48% in the year ending in March); the broader Standard & Poor's 500-stock index (up 51%); or the tech-heavy Nasdaq Composite (up 70%)?

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) ... FOUR BUBBLES!

These five indexes show a common theme: Southern California home appreciation is large — and even bigger as you move farther from the coast. My trusty spreadsheet says the average gains run 21% in the inland counties and 14% by the Pacific Ocean.

That does not mean that every house is worth that much more. You know, real estate is local.

So, a SoCal house hunter must look at any measure of appreciation — highest in many cases since the Great Recession ended — and wonder: Is this sustainable?

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]

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