San Diego Housing Market News and Analysis

The number I've read is historically 4-6 times income for the median priced house. 6 at the high end, 4 at the low.

Josh

Are you talking about Net Operating Income or Household Income?

In any area that's not shrinking (think, Detroit), finding something at 8x annualized rent is pretty good (assuming stable rents). Assuming that 30% of rent gets eaten up by costs (maintenance, vacancy, etc), that's 11.5x NOI and an 8.7% cap rate.

Can you find 7x rent in a market like SD? Probably, but it's very hard. Historically, it's been unusual, but not impossible. But who knows what the future shall bring?

It may make a strong shift here pretty soon if these measures dont pass tomorrow. If Arnold keeps his word and lots of people are laid-off. Also, cities wont be getting any financial help from the state either. This may actually put CA in the highest unemployment level since the 1930's. Wonder what it'll do to RE prices come this Fall?

Of course, I voted NO on all the measures except for 1F.

I'm waiting to see that happens after those ballot measures are defeated and the state runs out of money.

I was actually referring to house price to rent ratio, not so much income/rent ratio (though that's also an important metric). For example, one of the house I looked was renting for $2500/month, and on sale for $625,000, creating a ratio of 250. This is ignoring maintenance/property tax/other costs, but is easily to calculate for lots of properties.

180 to 210 is a pretty good range. Another metric is $ per sq ft. In newer developments like 4S Ranch or SEH, $1/sq ft is fairly common ie $3K monthly rent for a 3K sq ft house.

Let me clear that up a bit. 4-6 times household annual income. Up to the latest bubble its held true.

Josh

I would think 250 is terrible but I don't know the historical number. 100 is investment grade so it will probably not readily achievable. I will settle for 150 but not much more than that.

In some sense, I think the insanity of the housing market in Spring 2009 could rival the peak housing bubble time...particularly in the areas that the housing price does not have 50%-off for-sale sign on.

200 is the upper range of acceptable, in my opinion. This depends, of course, on interest rates. When interest rates were higher, the ratio used to be lower (150 or so). But, speaking for myself, today I would be a buyer at around the 200 mark. It wouldn't be a screaming deal, mind you, but it would be "acceptable".

Nowadays the low-end areas are way below 200, while the higher end still levitates at 250 or so (like in your example).

So, in theory....a $200,000 purchase price in an area where average rent is $1200 monthly results in ratio of 166?

What would you define the ranges of ratios

1) Fantasyland ____ to _____
2) Ideal _____ to _____
3) Profitable but less than ideal ___ to ___
4) Breaking even ____ to ____
5) Hello foreclosure ____ to _____

Yes, your math is correct. As another poster pointed out, sub 100 is when you get into very profitable investment territory (especially now with rates as low as they are). Rates do throw off this calculation some, as a lower rate means an investor can realize cash flow at a higher price than with a higher interest rate.

I think the historical average for San Diego is somewhere around 150-160.

My breakdown would be (using current rates)

1) Fantasy investors dream - < 80
2) Ideal (cash flow investment) - 80-120
3) Break even investment - 120-140
4) Rent neutral - 140-180
5) Overpriced - 180-220
6) WTF Bubble territory 220+

The difference between break even and rent neutral is the difference between an investor and a homeowner. A homeowner would be rent neutral at a higher price than the investor, since the homeowner has to pay rent every month. An investor has to allow a certain percentage of "downtime" for the unit, and cannot count on rent every month on a unit.

Is your question directed to me? Well, I'm not sure I could come up with a straight answer, but let me deflect it a bit by saying that the house price/rent ratio is a lot like the stock P/E ratio (with certain exceptions and caveats, of course). You only need to divide it by 12 (to consider yearly instead of monthly rent), and presto! you get something that looks a lot more familiar.

You would probably need sub 80 to be cash flow positive.

Have you heard of the 50% rule?
http://www.biggerpockets.com/forums/52/t...

Even in Mira Mesa (definitely not high end), the ratio seems to be over 200.

Ratio: 217
$1860 rent [craigslist]
http://sandiego.craigslist.org/csd/ap/11...
$404,500 price[zillow]
http://www.zillow.com/homedetails/11559-...

Ratio: 211
$1900 rent [craigslist]
http://sandiego.craigslist.org/csd/apa/1...
price[zillow]
$401,500 price [zillow]
http://www.zillow.com/homedetails/7462-D...

And I thought the real estate bubble had burst in the non-high-end areas such as mira mesa. How come we're not seeing ratios in the more reasonable 150 range?

Excellent! Thank you.

Last question, average rent is figured by average rent on a HOUSE of the similar bed/bad configuration or APARTMENT?

I assume house, but you know what they say about assuming....

Zestimate is garbage. They're pretty consistently well higher than what the market price is these days, and have been since the crash started - their model appears to be quite laggy.

If you'll look on the MLS, you'll find comparable area/size 4/2's going in the 320-350ish range. The highest a 4/2 of that size has closed in the past couple of months is at 375K.

Here's a close from 3/30 of this year - similar size, area (north of Mira Mesa Blvd), lot, and configuration. Sold for 325K.

http://www.sdlookup.com/MLS-090004996-82...

That takes it down to about 160-180x. Not investment territory, but not terrible.

But I don't think MM's SFR's have bottomed quite yet. However, they're pretty clearly a lot closer to the bottom than the ritzier areas. The areas furthest from the city core have come down farther (San Marcos, East County, etc).

You are correct - compare apples to apples. If you have a 3/2 condo with a carport and a patio, it will command less rent than a 3/2 house with a 2 car garage and a yard. Location also plays into it, of course.

The idea situation is to compare a model match (same floorplan, same area), but, of course, especially on houses, that will be difficult to do a lot of the time.

In the last cycle, Clairemont bottomed at a ratio of about 150x in 1995-1996, so I doubt any long-term average gets that low.
(150K house, 1000 monthly rent)

As for the ability to cash flow with reasonable down payments (e.g. 25%) at a specific level of this ratio, it depends directly on interest rates (as SDEngineer pointed out above). So there is no set number that makes sense in all interest rate environments.
Believing that there is or should be a fundamental number for this metric would be to ignore one of the largest expenses (at least in the initial years) in real estate investment (The mortgage payment).

At the 8 % rates we saw in the mid 1990s one couldn't really cash flow with the ratio at 150x.

With rates at 5% or so you COULD have positive cash flow with 20-25% down and a ratio of 150x.

I assume HOA fees would also have to factor in. A house with no HOA and no Mello Roos would be a simple ratio calculation. A house in a neighborhood with mello roos and HOA would have to have a lower ratio to realize the same cash flow.

Yes. I figure HOA/MR at about 10K of buying power lost for every $50 in those fees.