San Diego Housing Market News and Analysis
Shambing Away from Cheapness But Still Milling About In The General Locale of Affordability
Submitted by Rich Toscano on January 17, 2010 - 10:05pm
Well, I thought the old "Shambling Toward Affordability" title for this series of articles was a bit pithier but it just doesn't quite work now that home prices have been rising for the better part of a year. In any case, regardless of the what we want to call it, it's time to check in on San Diego housing valuations as of year-end 2009.
The 2009 home price rally reversed the direction of the shamble, but it didn't really change the overall picture, which is that San Diego home prices (in aggregate, of course) are still at middling levels of valuation.
Here's the price to per capita income ratio:
And the price to rent ratio:
Neither are close to "cheap" territory, but neither are they expensive. As a matter of fact, the price-to-income and price-to-rent ratios are, respectively, just 1.5% and 1.6% above the median ratios since the data series started in 1977. Those medians are admittedly skewed upward a bit by the recent protracted boom period, but still, it shows that valuations are not too terribly far out of whack.
Of course, these ratios don't take heed of issues like shadow
inventory, the sustainability (or lack thereof) of the government
intervention that has played a big role in the recent rally, and so
forth. But that's not what they are about -- they are about
comparing home prices to their historical relationship with rents and
incomes, and from that standpoint prices are still within reason.
Mind you, that is the aggregate San Diego home price as measured by the Case-Shiller index (or my proxy thereof, for the last couple months). As we all know, different areas of San Diego may exhibit a very different valuation profile. These countywide graphs provide a starting point and a good 5000-foot view -- they do not substitute for area-specific due diligence.
As opposed to the middle-of-the-road valuations for home prices,
monthly payments on homes are pretty much as cheap as they've ever been:
Since home purchase valuations are not all that cheap, the low payment ratios are obviously a result of ridiculously low mortgage rates (helped to their current levels by heavy-handed government intervention). As I've frequently pointed out, this is nice if you are a buyer who is going to lock in at these low rates for the very long term. But as far as it relates to home valuations it's not all that relevant. Low rates can provide a temporary boost to the market, but unless rates are going to remain low for a long time*, the fact that they are low right now doesn't affect the level of home valuations that San Diego can sustain over the long term based on local incomes and rents.
I like to update the payment ratios because they are interesting and they definitely have an impact on current market conditions. That impact is extremely favorable, obviously -- which is to say that however the housing market is doing, it would be doing worse than that if rates weren't so low. But low rates should not be used as an argument in favor of higher valuation ratios, as they often are, because it's never worked that way (nor should we expect it to, for reasons described in the previous paragraph).
For what it's worth, I expect the
valuation ratios to go lower at some point in the years ahead.
The main reason is that all the government stimulus borrows from future
demand, so when the time comes to "pay back" that demand, there will be
downward pressure on valuations. The (potentially severe) rate
increase that I expect at some point would also put downward pressure
on valuations. (That would be no more permanent an effect than
the current low rates' impact on valuations, but it could push them
down for a while).
This expected decline in valuations doesn't necessarily imply lower nominal prices, as currency debasement could cause everything to rise in nominal terms. It just implies that when the government stops providing so much housing-specific stimulus (if they stop providing so much housing specific stimulus), home prices will likely begin to fall in relation to rents and incomes.
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