As of March, there was still nothing for sale. In fact we hit an
all-time (in my data) low in months of inventory:
Prices rose accordingly:
Speaking of things going up really fast — 30 year mortgage
rates just hit 5%. This was at 2.9% 6 months ago! This is a violent
move, and because it started from such a low level, has a major
impact on monthly payments. I’ve made a couple charts to try to
visualize this impact.
First, here is the year-over-year change in the monthly
payment (nominal and inflation-adjusted) on a San Diego home going
back about 15 years.
You can see that affordability has taken a massive hit — even
adjusting for inflation, monthly payments are up over 40% over the
There is a seemingly comforting aspect to this chart, though: we
experienced a similar rate of change back in 2013, and things were
fine after that. This next chart illustrates the problem with that
idea. It shows the total change in the San Diego monthly
payment since November 2005 (the month the SD Case-Shiller index
peaked). At the time that the 2013 surge began, monthly payments
were down almost 60% from the bubble peak, in real terms.
They had plenty of room to go up while still keeping affordability
This time around, the surge began from a much higher valuation
level, so that the inflation-adjusted monthly payment is now where
it was at the peak of the housing bubble!
This is not good or healthy. For years I’ve been saying that while
purchase prices were high, low mortgage rates were keeping payments
affordable, so perhaps the high valuations were sustainable. Well,
the bond market has just spinning roundhouse kicked the legs out
from under that argument. Without the “but muh low monthly payments”
rationale, the housing market looks a lot more vulnerable to
less-than-perfect conditions (to my rheumy, jaded eyes anyway).
I suspect some people are reading this and thinking, “Look at how
little inventory there is — it shows that demand greatly outstrips
supply. So what’s the problem? Everything is fine.”
Well, you could have said that exact same thing in the spring of
2004. (And many did). But what was happening at that time was a short-term
mismatch of supply and demand, which people misinterpreted as
meaning that no price was too high. But when the drivers of that
short-term mismatch went away, valuations dropped back to earth.
I’m definitely not saying that this is the same situation as the
bubble (see last year’s
housing deep dive for more on that topic). My point is that
short-term supply-vs-demand, while a great predictor of short-term
price changes, doesn’t tell you much about the long-term sustainable
(This seems as good a time as any to mention that San Diego’s population
has declined for the past 3 years in a row. Yes, I know
wealthy Bay Area people are moving here and I agree that’s a
positive for home prices. But that’s not the only piece in this
So while the market is woefully undersupplied for the time being,
it’s also priced for perfection. And because perfection rarely
lasts, I have my doubts about the sustainability of this situation.
My guess is that if rates don’t come down, valuations will have to
Some more charts below…
* Valuations, as a reminder, can decline due to fundamentals
(rents and incomes, in this case) rising faster than
prices, or prices declining, or some combination of the two.
** Chart note 1: as in my valuation
graphs, for the latest month’s data point I used the most
up-to-date interest rate, as rates have changed quickly and the
latest figure gives the most accurate idea of what current buyers
*** Chart note 2: Bill McBride recently put out a chart of the
y-o-y change to nationwdie monthly payments, but I swear, I was
already planning on doing this chart! 🙂 I’m not stealing your
ideas Bill! Well, some of them, but not this particular one. BTW
Bill is a must-read for if
you care about the housing market.