The “valuation index” shown below compares San Diego home prices to
San Diego rents and per capita income. As of the beginning of 2020,
valuations had gone nowhere for 4 years. Then the pandemic hit, and
valuations popped 10% in a year. San Diego home prices (as compared
to rents and incomes) are easily the highest they’ve been outside
the bubble.
The next chart is similar to the first chart in that it compares to
local rents and incomes, but instead of measuring purchase prices,
it measures monthly payments (thus including the effect of mortgage
rates). This paints a very different picture than the first chart:
the rise in monthly payments has been more than offset
by the decline in rates! Monthly payment “valuation” is actually
lower than it was in early 2020, and was only lower at the depths of
the post-bubble housing crash.
Here’s a look at how home prices compare to incomes and rents
separately.
It should be noted that income growth was actually pretty robust in
2020, thanks largely to various economic stimuli that put money in
people’s pockets. Rents grew a lot more modestly, and actually
turned down near the end of the year. So, the price-to-income spike
looks smaller than the price-to-rent spike, but they are both in the
same neighborhood in the grand scheme of things.
Here’s a look at prices, incomes, and rents over the past 45 years:
Is this a bubble?
No. A bubble is more than just an expensive market… it is an
egregiously expensive market characterized by investors acting
totally nuts. Yes, purchase prices are expensive. But you can make
an argument that, because most home buyers finance the bulk of their
purchases, super-low mortgage rates are offsetting the higher prices
(see graph 2).
As for nutty behavior… I see some complacency, but not nuttiness.
(Unlike in growth stocks where we are now seeing a full-blown
speculative mania — see this
article we just put up for some fun examples of deranged
investor behavior).
Summary: yeah, it’s spendy, but kind of justified-ish by rates (if
they stay low), and investors are largely acting rationally. So, not
a bubble.
Are these valuations sustainable?
Also no, is my guess. The pandemic provided 3 boosts to housing
valuations, at least some of which are temporary.
- Nobody wants to sell a house during a pandemic/lockdown. When
the pandemic ends, more inventory will come to market. This one
is temporary. - Tons of people started working from home, which likely
increased the desirability of having a nice home (put another
way, I’d say it increases the amount people are willing to spend
on a home if they are there 24/7). Some people will keep working
from home post-pandemic, but many will not. So this one is
partway temporary. - I suspect that the plunge in rates was the biggest driver of
price increases. Again, graph 2. If rates stay this
indefinitely, then that supports higher home prices. But if
not… well, I refer you to late 2018, where a very brief
increase in rates was enough to start prices declining. Will
they stay this low? I don’t know, but given that they only got
so low because of a temporary pandemic, it seems sensible to at
least allow for the possibility that they could go back up.
The first two are, respectively, temporary and half-temporary.
The third is maybe temporary but nobody knows for sure (and
unfortunately for our analysis, that’s the biggest driver). So
we’ll see, I guess… but them all together, I think the odds are
that some of this valuation pop is given back.
BUT. That doesn’t imply a crash or anything… I’m just talking
about this rapid 10% valuation increase we had (and maybe not even
all of it). Going back to the 2015-2019 range would be a fairly
minor adjustment.
There is a risk of a more serious decline in prices (obviously —
when valuations are unusually high, that’s always a risk). But I
suspect that would take a more substantial rise in interest rates,
vs simply a return to what we saw pre-pandemic.
January 29, 2021 @ 5:29 PM
Great update. When I read the
Great update. When I read the first blurb and looked at the first graph my knee jerk reaction was but rates! Then you addressed that and all was good again.
I do think you are missing the 4th driver though and it goes along with something I debated many posters on here over a decade. Many parts of SD including where I live on the NCC have fundamentally changed. It was the argument against it is never different this time but it was. For example, Encinitas went from a funky out of the way place up to the the mid to late 90’s that many professionals wouldnt consider to a glamour town by 2010.
Now the area is fundamentally taking the next leg up as we see an influx from higher cost areas (OC, LA, Bay Area, Northeast) of wealthier folks that can now work from home and are looking to get away from greater density. What I am seeing on the streets could not have been predicted and feels even more powerful than the last shift.
January 29, 2021 @ 6:45 PM
Thanks. I had replied but I
Thanks. I had replied but I realized my reply didn’t make sense because it’s Fri afternoon and my brain is shutting down. 🙂
Anyway, fair point… that could be a permanent factor in the upward direction.
January 30, 2021 @ 2:28 PM
There’s a fifth possible
There’s a fifth possible factor, which is the wealth disparity. SFR’s are increasingly only possible for the top income bracket of the population to own. There might be a long term divergence of general income/rent price and housing price, which is becoming ever less accessible for all but those in the wealthiest 20% (maybe only 5-10%) in the coastal part of SD. The society/economy might be fundamentally changing in such a way that landowners will become a class of their own. It reminds me of Switzerland, where I briefly contemplated moving my family – the land is so expensive that the vast majority of people rent. Those who own only compose 1% of the population or something. They’re the landed class who are ultra rich and don’t have to work to have a very comfortable life.
Low interest rates are really helping those of us who already own to gobble up even more real estate. While the rising price is stopping young families from joining the landed class. I see many friends who are stuck on the renting side and who can’t see a way out. While on this side we just refinanced our house and bought a condo at super low rates and our total payment is barely going up.
Maybe a more relevant denominator for valuation would be income of those who are buying homes instead that of the entire population.
January 30, 2021 @ 3:29 PM
Thats an interesting
Thats an interesting proposition. I think there are enough rich folks from other places to fill this place up along the coast and others with less means will just have to go other places like Mira Mesa which is rapidly gentrifying upward now.Those here already will hold on and pass onto family not just west of the 5 but a mile or two inland also. I beleive the corridor from Laguna Beach to Newport Beach is our future here from Del Mar through Carlsbad. There you have very wealthy more recent arrivals with long timers dug in.
Oceanside will rise also but more along the lines of Huntington Beach with far more commercial development. Either way it will be fun to watch and I hope Im around long enough to see how it all turns out
January 31, 2021 @ 6:51 AM
Thanks, Rich
This is useful.
Thanks, Rich
This is useful.
I am really wondering about interest rates.
1. Where is inflation?
2. What happens to rates when the stock bubble bursts and we are plunged into a recession?
The stock bubble article is pretty mindblowing. I have seen my 401K go up and up. And I just don’t get understand why. Are people expecting a huge post-COVID earnings bump?
I’ll keep investing in my Vanguard target fund for the 401K. In the long term, the stock market will be fine.
I really do not know where to put my non-retirement savings – everything looks weirdly valued.
But as you say, bubbles are odd and maybe in a year, I will be wishing I invested everything in the stock market.
January 31, 2021 @ 9:24 AM
The stock and real estate
The stock and real estate bubble is easy to understand, all you have to do is look at one chart:
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
This is why the Reddit Wall Street bets group is so interesting and refreshing. They are young, educated people who recognize the effects of the above chart. Namely that they are priced out of buying their own homes and their generation will be responsible for paying off all of this debt that is making the elites filthy rich. They are understandably angry about this, as we all should be, and they are actively sticking it to the system.
January 31, 2021 @ 9:31 AM
And by the way, stock prices
And by the way, stock prices have nothing to do with earnings, present or future. Look at Tesla, it makes the 1999 tech bubble seem mild in comparison.
That’s why it is so comical watching these Wall St. clowns on CNBC complaining about the Gamestop trade because it doesn’t have fundamentals to support the astronomical price, as if anything on Wall St. is based on fundamentals anymore. What a bunch of hypocrites.
January 31, 2021 @ 9:45 AM
deadzone wrote:And by the
[quote=deadzone]And by the way, stock prices have nothing to do with earnings, present or future. [/quote]
Yes, this is the kind of thing people say during late-stage bubbles.
I mean, I guess you are right that in the short term, they don’t. But in the long term that’s really all that matters.
January 31, 2021 @ 11:28 AM
Rich Toscano wrote:deadzone
[quote=Rich Toscano][quote=deadzone]And by the way, stock prices have nothing to do with earnings, present or future. [/quote]
Yes, this is the kind of thing people say during late-stage bubbles.
I mean, I guess you are right that in the short term, they don’t. But in the long term that’s really all that matters.[/quote]
Exactly, so you have to agree that we are in a ginormous stock bubble. Earnings don’t matter. The market is driven purely by speculation and funded by the trillions of dollars of Fed monetization (again, see chart). This is 1999 all over again. But seriously, at no point in the last 12 years did earnings really matter. The markets only went up due to the Fed support. A monkey could have made money in this market by choosing random stocks.
January 31, 2021 @ 11:37 AM
I do agree that parts of the
I do agree that parts of the stock market are in a bubble. I guess I misunderstood what you were trying to say with your earnings comment.
January 31, 2021 @ 8:13 PM
Rich Toscano wrote:deadzone
[quote=Rich Toscano][quote=deadzone]And by the way, stock prices have nothing to do with earnings, present or future. [/quote]
Yes, this is the kind of thing people say during late-stage bubbles.
I mean, I guess you are right that in the short term, they don’t. But in the long term that’s really all that matters.[/quote]
I think it’s unfair to pull out tesla and say stock prices have nothing to do with fundamentals. It’s true some don’t buy many do. It depends upon what you invest in
January 31, 2021 @ 8:31 PM
Well the stocks that move the
Well the stocks that move the S&P 500, which is what most peoples 401Ks are tied to, are the FANG stocks plus now Tesla. All of these stocks, just like their 1999 Tech stock brothers, have prices that are in no way related to earnings.
January 31, 2021 @ 8:44 PM
That’s a five stock strawman.
That’s a five stock strawman. Tesla and Netflix have extraordinary and very high P/E ratios respectively. The others are more inline with overall market and growing earnings and revenue strongly. I just checked and those five stocks are under 8% of my portfolio and only because my Apple has done so well
January 31, 2021 @ 9:44 AM
deadzone wrote:The stock and
[quote=deadzone]The stock and real estate bubble is easy to understand, all you have to do is look at one chart:
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
This is why the Reddit Wall Street bets group is so interesting and refreshing. They are young, educated people who recognize the effects of the above chart. Namely that they are priced out of buying their own homes and their generation will be responsible for paying off all of this debt that is making the elites filthy rich. They are understandably angry about this, as we all should be, and they are actively sticking it to the system.[/quote]
They’re not “sticking it” to anyone. The vast majority of the redditors are going to lose their shirts.
January 31, 2021 @ 10:15 AM
Rich Toscano wrote:
They’re
[quote=Rich Toscano]
They’re not “sticking it” to anyone. The vast majority of the redditors are going to lose their shirts.[/quote]
One anecdote.
I made a comment on Reddit thread to remind everyone about taxes. I got this private message:
“I saw you made a comment about taxes that people will pay for the gains. I was curious if you know do you only have to count the taxes when you cash out of the app? Or do I have to tax it for every share I make a profit in for the year even if I never cash out from the app.”
I can only imagine what is going to happen with folks using options.
January 31, 2021 @ 11:40 AM
bewildering wrote:Rich
[quote=bewildering][quote=Rich Toscano]
They’re not “sticking it” to anyone. The vast majority of the redditors are going to lose their shirts.[/quote]
One anecdote.
I made a comment on Reddit thread to remind everyone about taxes. I got this private message:
“I saw you made a comment about taxes that people will pay for the gains. I was curious if you know do you only have to count the taxes when you cash out of the app? Or do I have to tax it for every share I make a profit in for the year even if I never cash out from the app.”
I can only imagine what is going to happen with folks using options.[/quote]
That’s a good one! FWIW I read an article arguing a similar thing… a lot of the RH crowd thinks they don’t have to pay taxes as long as they keep the money in the account:
https://www.bloomberg.com/news/articles/2021-01-26/tax-for-trading-stocks-robinhood-investors-confused-over-how-much-they-must-pay?sref=uUxnJ0EX
January 31, 2021 @ 11:29 AM
Perhaps, but that’s not the
Perhaps, but that’s not the point. The goal is to punish Wall St. So far this movement is only growing in power. Also, it was reported that Melvin Assets Hedge funds lost 53% in the month of January. They are only solvent due to emergency loans from other hedge funds. I suggest you do more research on this, this movement is real and is the start of something big. Don’t be brainwashed by the mainstream financial press.
February 1, 2021 @ 10:35 PM
Very interesting update. San
Very interesting update. San Diego real estate has definitely been interesting to watch over the many years we’ve been investing, and it’s getting even more interesting with the additional factors mentioned in this thread. Everyone seems to be discovering our little corner of paradise.
Too bad we can’t take any of this with us, but, it’s comforting to know we can enjoy it all now, then pass it on to the family.
February 2, 2021 @ 8:45 AM
flyer wrote:Everyone seems to
[quote=flyer]Everyone seems to be discovering our little corner of paradise.
[/quote]
That’s what they said during the bubble (it wasn’t true, it turned out) so your comment made me curious to check. As of a year ago, it still wasn’t true – San Diego net migration was negative and population growth was barely positive in the 5 years through early 2020.
https://www.globest.com/2020/01/03/san-diego-population-growth-is-slowing/?slreturn=20210102113116
It remains to be seen whether this has changed as a result of the pandemic (sdrealtor’s theory). I am a bit skeptical of it, because it’s gotten so expensive here… for sure some people who now work from home will want to move here, but that could be offset by those who want to go somewhere more affordable. But it’s possible.
It will be interesting to see the migration numbers for 2020 and beyond…
February 2, 2021 @ 8:50 AM
Maybe more accurate to say
Maybe more accurate to say all flyers rich friends are. A change in the mix is what seems to be a foot. We are fairly built out. It’s not necessarily the quantity of people but rather the wealth of said people. This place feels like it’s growing richer every year.. Either way you’ll already be our favorite rich
February 2, 2021 @ 9:58 AM
I concur with sdr and flyers.
I concur with sdr and flyers. It’s not about total net migration but more of who’s moving in vs who’s moving out. I know it’s anecdotal, probably similar to what flyers is basing his assessment on, but a friend of mine has 7 young professional relatives who was living in the bay area before COVID. over 1/2 of them have now moved back to San Diego and bought. I think those who can afford our sunshine tax will continue to move here.
February 2, 2021 @ 11:44 AM
Yeah that’s a good point, the
Yeah that’s a good point, the net migration doesn’t tell the whole story.
February 17, 2021 @ 8:01 PM
So I wonder how many people
So I wonder how many people have their down payment in stocks. According to our realtor, “a lot.” This makes me think, if there’s a stock market crash then that’ll immediately reduce the purchasing power of a lot of buyers.
February 18, 2021 @ 10:14 AM
Most people have their
Most people have their investments and then go to cash when they are getting close to buying a home. With 20 to 50 buyers lined up for most homes I wouldnt count on even that helping. More inventory is the only answer. Right now new listings are 30 to 40% below last year
February 18, 2021 @ 4:09 PM
sdrealtor wrote:Most people
[quote=sdrealtor]Most people have their investments and then go to cash when they are getting close to buying a home. With 20 to 50 buyers lined up for most homes I wouldnt count on even that helping. More inventory is the only answer. Right now new listings are 30 to 40% below last year[/quote]
That is not that much different than trying to sell at the top of the stock market before it crashes, which is hard to time right — except maybe it’s even less under your control because you don’t know if you can find the right house to buy at the right time.
Thank you for putting the Mira Mesa and N. County Coastal monitors. I feel like lately there’s been a better balance of listing and pending in those areas as well as some others I’m watching. I’m also noticing a large number of pendings are actually short sales lately. Do you think you could include how many are short sales in your monitors? That could be another piece of interesting data. Thanks!
February 18, 2021 @ 10:06 PM
What you are starting to see
What you are starting to see is seasonality. Listing inventory traditionally picks up after the Super Bowl. Unfortunately so does buyer demand. Houses in my neighborhood are getting 20 to 40 offers. I just booked a showing for a $1.25M house in 4S Ranch that was listed a few hours ago. There were already 53 showings scheduled.
As for short sales, they are virtually non-existent and I rarely if ever see one. If they were worth tracking i would as I did 10 years ago. For now they have zero influence on the market. Im not sure what you think you are seeing but they are most likely marked incorrectly. Even if one came on the market there is so much demand it would get bid up to full retail. I feel for anyone trying to buy right now. Its tough
What areas are you looking?
February 19, 2021 @ 2:34 PM
Even if you paid 0% down and
Even if you paid 0% down and made zero payments for 2 years, would that be a short sale? I don’t think so.
Short of a fraudulent prior transaction I agree with SDR the supposed short sale was a mistake in the listing.
As for lack of listings, the data I posted for 92106/7 showed the numbers of transactions went way up in 2020. The lack of inventory is entirely driven by a surge in buyers overwhelming a smaller increase in sellers.
February 19, 2021 @ 4:54 PM
gzz wrote:Even if you paid 0%
[quote=gzz]Even if you paid 0% down and made zero payments for 2 years, would that be a short sale? I don’t think so.
Short of a fraudulent prior transaction I agree with SDR the supposed short sale was a mistake in the listing.
As for lack of listings, the data I posted for 92106/7 showed the numbers of transactions went way up in 2020. The lack of inventory is entirely driven by a surge in buyers overwhelming a smaller increase in sellers.[/quote]
Incorrect. new listings are down 30 to 40% so far this year over last year up by me. Countywide they are down about 20%
Here’s one for you. 92107
last 1/1 to 2/15 44 SFR and attached listings
This 1/1 to 2/15 27 SFR and attached listings
92009
Last year 147
This year 91
March 5, 2021 @ 9:49 AM
CAR just released January
CAR just released January year over year stats. Statewide median price up 21.7 % and active inventory down 53.4%. Just astounding
February 19, 2021 @ 2:43 PM
This 3.5 mil spec house sold
This 3.5 mil spec house sold immediately.
Great modern design all around.
The staging furniture is ugly though.
https://www.sdlookup.com/MLS-210000535-4415_Piedmont_Dr_San_Diego_CA_92107