Southern California is home to some of the most overpriced housing markets in the country. And that’s taking the wind out of the recovery.

Three Southland regions ranked among the five most overvalued markets in the U.S. in a new report by real estate website Trulia. These are places where the housing costs have far outpaced growth in income.

Separately Tuesday, the closely watched S&P/Case-Shiller index reported that Los Angeles home prices inched down in January — the first monthly decline in two years.

“Southern California has seen big price increases since the bottom,” said Jed Kolko, Trulia’s chief economist, “without big increases in income.”


Coupled with the rise in interest rates and new mortgage rules, the slow growth in paychecks has sidelined many buyers, especially those who are uncertain about their jobs and those who don’t own a home and missed last year’s run-up in prices.

“There’s an affordability issue here,” said Stephanie Karol, U.S. economist at IHS Global Insight, a Massachusetts forecasting firm. “People who are not currently in a home they can sell are having a lot more trouble finding a house they can buy.”

That’s happening in a number of regions across the West that saw price jumps last year as investors gorged on big inventories of foreclosures. Although incomes are growing — personal income climbed 2.8% in California last year, according to new numbers Tuesday from the Commerce Department — home prices are growing faster. Prices are up 18.9% in metro Los Angeles from last January, according to S&P/Case-Shiller.

No place is that gap between home price and income growing faster than in Southern California, which led Kolko to rank Orange County, Los Angeles and the Inland Empire among his five most overvalued markets in a “Bubble-Watch” report he issued Tuesday. If a new housing bubble is forming, he wrote, it will form here first.


But Kolko was quick to note that the picture is a lot better today than it was in 2006. “This is not the edge of a cliff,” he said.

Indeed, those price gains have largely stopped in recent months, which could give the broader economy time to catch up with the housing market. That’s partly because interest rates have climbed, and partly because investors have pulled back, said Mark Zandi, chief economist at Moody’s Analytics. The housing recovery, he said, needs a new economic engine.

“The job market has to continue to improve,” Zandi said. “As people are more confident they can hold on to their job, they will start buying more homes.”

It also would help if credit eased. After the housing bust, lending standards swung too far in the opposite direction, he said, and that has hurt sales.


Lending rules have been a factor even in the last few months, said David Cabot, chief executive at Berkshire Hathaway Home Services California Properties in San Diego. New mortgage rules that took effect in January gummed up some sales while brokers adapted. That may have had some effect on January and February sales.

But Cabot sees the spring getting off to a good start, with buyers and sellers both testing the market.

“We think the spring season should be very healthy,” he said.

And there are signs in the data that things are perking up. The California Assn. of Realtors reported Tuesday that pending home sales — contracts signed but not yet closed — increased faster than normal from January to February. The inventory of homes on the market also is increasing, up 13% from February 2013 across the six-county region.


But the real health of the recovery will take a few months to become clear, Kolko said. And it will hinge on factors that extend well beyond the housing market.

“The test this year will be whether regular people looking to buy homes for themselves can pick up the slack from investors,” he said. “Ultimately that depends on how well the economy does.”

tim.logan@latimes.com

andrew.khouri@latimes.com