Low rates have been one of the mainstays of the bullish arsenal. But given that mortgage rates are where they were four years ago, then they shouldn’t be a factor in explaining any price difference that has taken place during that time period.
So if we take rates out of the picture, we are left with population, housing stock, inflation, and incomes: all factors that would affect both rents and home prices. Which is to say, if rates are the same now as they were four years ago, why should home prices have risen so much more than rents during that time?
As the chart indicates, the answer is "sentiment." Rates are no longer an excuse (not that they ever were, for reasons discussed in the last credit market report). The gap between rental growth and home price growth over the past four years is illustrative of the speculative premium that people have come to attach to home ownership during that period.
For data nerds:
- I assumed that the ratio of rental stock to residential/owner-occupiable stock was the same throughout, although I am almost certain that residential supply increased more than rental supply (witness the condo conversion craze).
- To estimate 2006 rents I used the latest nationwide rent increase figure of 7%, though I imagine that number is smaller in San Diego due to our outmigration and population decline.
- To estimate 2006 home prices I used the latest year-over-year median price change of .4%. Pretty rough, I admit, but none of these assumptions materially affect the point I am trying to make (and for the most part they do so in favor of housing).
This discussion reminds me how confused I get when people try to discredit this site by pointing out that all my data is meaningless because the housing market is driven by psychology and emotion. No kidding. The whole point of this site is and always has been to argue that the market has been driven by emotion rather than economic fundamentals. That’s pretty much what a speculative bubble is… and it’s also pretty much exactly what we see pictured above.