[quote=SD Realtor][quote=davelj]The issue for housing prices vis-a-vis interest rates is the degree to which rents increase along with interest rates (which eventually reflect the general level of price inflation). If rates rise meaningfully more than rents then housing prices will fall. If rents rise more or less as much as interest rates then housing prices will be largely unaffected even if rates rise (see the 70s and early-80s for an example of this).
If the value (V) of a perpetual stream of cashflows (CF) is denoted by:
V=CF/(R-G)
where R is the interest rate and G is the growth in the cash flows, you can see that if G (re: rents) is increasing at the same rate as R (rates)… the denominator stays the same and the value is unchanged even as rates rise.
So, the issue of the impact of higher interest rates on housing prices must be discussed in the context of the degree to which rents follow the general level of inflation (the latter will drive interest rates).[/quote]Dave I think it could be argued that the relationship between housing prices and salaries for a given region would alter the formula you put forth. For the most part I would agree with that formula for most of the country however I think it doesn’t hold up as well for areas with distorted prices. For proportional price hikes the buyers pool shrinks more rapidly in the distorted regions especially as lending standards tighten up.[/quote]
I don’t quite understand the formula dave proposed here but I understand what he was trying to say re: rent levels proportionate to interest rate levels with regard to positive/negative cash flows for a landlord. (Correct me if I don’t have this right, dave).
And I also understand what SDR is saying here, but don’t think it rings true for SD County. I believe low and moderate income tenants or potential buyers of same have ACCEPTED the “sunshine tax” for housing in SD County for many years as a prerequisite to living here and will continue to do so. Many will simply use more incomes (thus put more persons on the lease or title) to rent or buy a property. I believe this is due to “coastal” SD County’s near-perfect weather 95% of the time and its proximity to Mexico and LAX (Asian immigrants) and also shortish driving distances to desert and mountain resorts in AZ and RIV and SB Counties.
EVERYONE here has the option of voluntarily moving to the nation’s midsection (for example), where housing is cheaper, often better built and there are more jobs. But how many actually do? Life is *very* different there than here. There is price to pay for everything. SD County’s desirability isn’t going away, prices here are a function of supply and demand (just like anywhere else). A legal (or even illegal – with cash) immigrant from south of the border can buy property here and STILL live in close proximity to their families in Baja Norte, MX and even <= a day's drive to Baja Sur, MX and the interior state of Sonora along the Sea of Cortez. Besides Imperial County (often hot & dusty), where ELSE is this possible??
If your answer is Brownsville, TX, that (gulf) region and the MX state of Tamaulipas don't hold a candle to the Pacific Ocean and Baja, CA. They're not even in the same league.
I believe the VALUES here are different for the middle-class on down to low-moderate income buyers/tenants here. Many persons who reside in SD County who are not well-established here (i.e. have little to no assets) and sometimes no familial ties are (consciously or unconsciously) *willing* to give up a certain amount of discretionary income to remain here (i.e. keep their rent or mtg/taxes paid).
I have come to the conclusion that longtime and native residents of the nation's midsection with comparable incomes to low/moderate-income San Diegans are established near their families and used to consuming or saving more and thus are NOT willing to relocate to a coastal locale with prices similar to SD County's because they have NO IDEA what they are "missing" by not living here, nor do they care. Different strokes for different folks.
I believe that even if all recent SD "transplants" become disgusted with what they can buy/rent here and load up their moving vans to places like Tulsa, OK, where they can buy a sprawling, manicured 2700+ sf mid-century brick ranch on a "leafy" 1/2+ AC lot in the middle of town for $250-$275K, SD's RE market will not miss a beat. These former residents' SD homes will be promptly rented/sold to longtime San Diegans (or their children, often with parents' help), SF bay area transplants or immigrants from everywhere in the world (both longtime and recent residents).
Believe it or not, areas such as Paradise Hills, Valencia Park, Lomita Village and Nestor (all City of SD) are VERY desirable to particular subsets of buyers and tenants both culturally and location-wise.
I don't think we are currently in a RE "bull" market by any stretch of the imagination, but this is just the way I view the region, based upon my own experiences. Looking thru the eyes of many potential first-time buyers, I just don't see the issue of SD's "desirability" and "buyer willingness to pay" as a pure numbers game, as many Piggs seem to.
In short, I don't think any (real or perceived) "price distortion" has or will ever affect the desirability of the SD region. Where there is a will, there is a way to rent/purchase a place to live in SD. Persons who want to buy bad enough can will find a way, even under more stringent mortgage underwriting guidelines (as they did "pre-millenium bubble"). Nothing has changed in this regard.
