San Diego Housing Market News and Analysis
Shambling Towards Affordability: May 2013
Submitted by Rich Toscano on May 22, 2013 - 5:24pm
With recent robust price increases has come a resurgence of talk about a bubble. Whether a given investment is in a bubble or not may depend on many factors, but in my mind, the most important of these is valuations. If valuations (properly measured) do not show the asset to be extremely overvalued, then you probably aren't dealing with a bubble. This is not to say the asset can't go down in price -- not at all. It's just to say that it's not a proper "bubble."
So what are valuations telling us about the state of the San Diego housing market right now? Let's have a look at the two most important ratios that have guided us through this boom and bust: the home price to income ratio, and the home price to rent ratio. These ratios compare home prices with two real-world fundamental underpinnings: how much potential home buyers earn, and how much it costs to rent (put another way, how much it costs to not buy). Over time they have tended to "mean revert" around a middle of the road value which we can roughly say represents the fair value for San Diego housing.
Let's start with the price-to-income ratio:
As it happens, the current p/i ratio stands almost exactly on top of the long-term median value (less than 1% above). This surprised me a bit, given the recent jump in prices. But the last time I updated this graph at the end of 2011, prices had gotten a decent amount below fair value. So, prices had a bit to rise to get to fair value, and nominal incomes have done some of the work by rising that entire time as the economic recovery has plodded along.
Homes look just a little pricier based on the price-to-rent ratio:
Here, they are 6% above their historical median. This is actually not terribly far from the p/r ratio peaks in the early 1980s and 1990s, but it is nothing like what we saw during the bubble in the mid-2000s, when the p/r ratio reached 83% over the median.
Summing up: the price-to-rent ratio says that San Diego homes are very mildly overvalued, and the price-to-income ratio says that they are right at fair value. San Diego homes aren't cheap, but they aren't notably expensive either -- and it seems they are still a good distance from bubble territory.
Next up, a look at the monthly payment ratios...
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