These graphs are updated through May, the latest month of Case-Shiller data:

There’s been some progress towards affordability on both metrics — the price ratio is down 17%, and the payment ratio 12%, from their respective peaks. But both remain quite high compared to history.

The significance, in English, is that buying a home in San Diego is unusually expensive vs. renting one, and that is the case whether looking at purchase prices or monthly mortgage payments. Both measures have been this high in the past, but neither has been able to remain there. 

My guess is that they won’t stay their this time either. I do think it’s likely that the pandemic gave a permanent boost to San Diego’s valuations. The remote-work revolution increased the premium on residential housing everywhere, and likey even more so in especially desirable/popular places like San Diego. It’s hard to know the size of this effect, though, and my suspicion is that it’s not big enough to justify the huge jump in valuation (decline in affordability) that we see in the charts above.

If affordability is to improve, it could happen by some combination of prices going down, rents going up, or — in the case of monthly payments — mortgage rates declining.

I don’t anticipate a ton of relief from rates. They may feel high compared to what we remember in the pre- and early-pandemic era, but that period was really an aberration. Current mortgage rates, and the spread between rates and inflation, are much closer to historical norms than the they were in the post-GFC era. So unless we’re going back to that interest rate regime, it doesn’t seem like rate have a long way to fall on a sustainable basis. 

Also, if rates were to decline, that could bring a lot of locked-in inventory to market. (Meaning, owners with low-rate mortgages who were waiting for rates to decline before selling would finally have their chance). This increase in inventory would put downward pressure on home prices, in the opposite dynamic from when rate lock-in kept inventory low and helped prices remain stable even as rates shot upward. That said, this would be a temporary phenomenon, as any inventory surge would eventually be absorbed by the market.

That leaves much of the work to be done by rising rents, falling prices, or some combination. My feeling is that this depends a lot on the economic climate, and on how long the adjustment takes. In a strong economy, prices might largely hang in there for several years as rents eventually catch up. In a recession, the adjustment could be quicker, and be driven more by prices falling to meet rents. 

For now, it seems like the long standoff between buyers and sellers is resolving in favor of the buyers. This raises the chances of further price declines being a part of the adjustment in the near term, but it doesn’t tell us much about how any return to affordability will play out over the long run. For that, we just have to watch and wait, and update our views as new information comes in. I’ll try my best to do that here!