San Diego Housing Market News and Analysis
Monthly Payment Ratios, May 2013: Homes May Not Be Cheap, But Mortgages Sure Are
Submitted by Rich Toscano on May 24, 2013 - 9:48am
I recently updated the price-to-income and price-to rent-ratios for San Diego single family homes. I think these are the best metrics to determine whether homes are overpriced or underpriced based on their fundamental economic underpinnings.
It's also interesting to look at the ratio of monthly payments to incomes rents, but for a different reason. I'll get into this in a moment, but first let's check out the graphs:
The recent price increases have just been a blip compared to the incredibly low level of interest rates. The payment-to-income ratio is 41% below the historical median, and the price-to-income ratio is 38% below it.
In my view, it is erroneous to use these graphs in support of the argument that "housing is cheap." The payment-based ratios combine home prices and mortgage rates to tell you how good a deal you are getting by financing a home at that particular time. But if the question is whether homes are cheap or expensive on a long-term, sustainable basis, interest rates don't really figure into it in my view. Rates can go up and down over time, but it is incomes and rents that will determine how much houses are intrinsically "worth." I guess another way to put it is: low rates help, but only for as long as they stay low. (And when they have nowhere to go but up, one could even argue that that is a source of potential downward pressure on prices in the future).
Just to emphasize the point -- according to the payment-to-income ratio (if one were to try to use it as a valuation metric), houses were more "expensive" in 1985 than in 2006. In fact, the price-to-income ratio shows that housing was dirt cheap in 1985, and absurdly overvalued in 2006. (In case the below graph isn't convincing enough, consider the subsequent price changes in each case).
So the payment-based ratios don't justify the view that houses are cheap. However, they do tell us that if you are financing a long-term home purchase with a fixed-rate mortgage, you are pretty much getting the deal of a lifetime.
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