San Diego Housing Market News and Analysis
Shambling Further From Affordability
Submitted by Rich Toscano on August 28, 2010 - 10:13am
The continued rise in San Diego home prices has pushed valuation ratios northward -- but according to the home price-to-per capita income ratio, prices are still fairly reasonable:
The price-to-income ratio is just 2% over its long-term median. Of course the median was pulled upward by the protracted period of high prices this decade, so another way to compare with past valuations is to note how far below past housing cycle peaks we are. I am referring here to the peaks in 1979 and 1990. Valuations during this decade's bubble were driven into the stratosphere by a frenzy of reckless lending that won't be repeated in our lifetimes, so that's not really a good comparison. But the similar (to one another) peaks in 1979 and 1990 suggest an upper limit to how high valuations can get in the absence of ubiquitous neg-am, no-doc loans. Even by this measure, the price-to-income ratio is not raising any red flags -- July's figure was a comfortable 17% below the 1979 and 1990 peaks.
The price-to-rent ratio is telling a bit of a different story. While only 6% above its median, this ratio is just 4% below the average peak value in 1979 and 1990. If you cover up the wild 2000s ride with your hand, you can see that valuations by this measure are approaching what had formerly been housing boom peaks back in the old days.
Ultra-low mortgage rates are no doubt playing a role in pushing prices up. The charts below show that the monthy payment-based ratios are still near all-time lows thanks to mortgage rates that are at all time lows during the time period measured.
As I always point out in these updates, the mortgage rate level may be of paramount interest to an individual buyer who is locking in a long-term loan rate, but it's just not all that relevant in determining what is a long-term sustainable level of housing valuation. This is because rates exert an ephemeral influence, while income and rent levels (short of undergoing big changes in nominal growth rates due to a seismic economic shift) are here to stay. The relative unimportance of rates to this question is evident in the fact that the payment ratios tended historically to move up and down with mortgage rates, at least until the subprime frenzy came into being.
All standard disclaimers about aggregating a diverse county's worth of homes into a single figure or two apply. These numbers describe what's going on in the market as a whole. And even at that level we are getting a mixed bag of results. Payment ratios suggest homes are dirt cheap, but these are the far less meaningful metrics. The price-to-income ratio indicates slightly-above-typical but still reasonable pricing, while the price-to-rent ratio suggests that homes are once again flirting with overvaluation. Unfortunately all we can tell for sure is that San Diego housing in aggregate is neither outlandishly expensive nor excessively cheap.
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