Still No Housing Bubble in San Diego

Submitted by Rich Toscano on June 5, 2017 - 1:27pm
Bubble chatter has been on the rise, especially with the recent new all-time high in in the SD median (nominal) home price. In my latest article for Voice of San Diego, I make the case that San Diego housing exhibits neither the valuation nor the behavioral characteristics of a bubble:

There’s Still No San Diego Housing Bubble Yet

The article includes a chart that will be new to Piggs, showing the speed of price increases now vs. during the late-stage bubble.

(Remember, digital charts are most compelling if you print them out on paper and hold them up to a video camera -- the lower resolution, the better).

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Submitted by EconProf on June 5, 2017 - 6:08pm.

Thanks Rich for your revealing graphs and insightful commentary.
I agree that we are not yet in a true bubble, in that the signs of mania are not there. However, we need not reach that peak in order for prices to fall.
The previous two peaks, roughly in 1980 and 1990, were lower that the current level, as your graph shows. Those price declines were triggered by recessions. Since no recession is on the horizon, prices will probably keep climbing, at lease for now.

Submitted by Escoguy on June 5, 2017 - 8:29pm.

I tried leasing now but it was too expensive.

Submitted by bewildering on June 5, 2017 - 9:29pm.

EconProf wrote:
Thanks Rich for your revealing graphs and insightful commentary.
I agree that we are not yet in a true bubble, in that the signs of mania are not there. However, we need not reach that peak in order for prices to fall.
The previous two peaks, roughly in 1980 and 1990, were lower that the current level, as your graph shows. Those price declines were triggered by recessions. Since no recession is on the horizon, prices will probably keep climbing, at lease for now.

I do not think prices in 1980 declined in nominal terms? House price inflation just did not keep up with general inflation.

Perhaps Rich can confirm.

Submitted by EconProf on June 6, 2017 - 6:37am.

Good point, since inflation in 1979, '80, and '81 averaged 11.7%. Rich, what is the verdict?

Submitted by Rich Toscano on June 6, 2017 - 2:11pm.

Yep, in the early 80s home prices just flattened out while rents/incomes caught up. (FWIW, I've heard that sales activity was extremely low during this period, but I don't sales volume data).

Also econprof, I agree that prices needn't reach bubble level to decline. I just want to distinguish a cyclical decline (of the type which could happen any time, really) vs. an ugly post-bubble crash (of the type we'd expect after a major bubble).

Submitted by spdrun on June 6, 2017 - 3:17pm.

80s vs today. Home prices actually tracked inflation well in the 80s, vs now...

Submitted by bewildering on June 6, 2017 - 7:38pm.

spdrun wrote:
80s vs today. Home prices actually tracked inflation well in the 80s, vs now...

I am very confused by this chart. The Case Shiller data does not look like the historical data from Shiller's website

http://www.econ.yale.edu/~shiller/data.htm Click on "US Home Prices 1890-Present."

Submitted by spdrun on June 6, 2017 - 9:50pm.

Mine is nominal vs inflation. His is inflation-adjusted over time.

Submitted by gzz on June 7, 2017 - 4:37am.

Agree with most of the article, except I don't think rates are unusually low. Japan is now at year 26 or so of near-zero rates. Our rates are nearly the highest in the first world.

Submitted by Rich Toscano on June 7, 2017 - 7:37am.

gzz wrote:
Agree with most of the article, except I don't think rates are unusually low. Japan is now at year 26 or so of near-zero rates. Our rates are nearly the highest in the first world.

Neither of which is relevant to the fact that rates are unusually low.

Submitted by Rich Toscano on June 7, 2017 - 8:48am.
Visual aid for you:

Submitted by justme on June 11, 2017 - 4:38pm.

I have not read Piggington much lately, but it surprises me that Rich Toscano does not see a bubble at today's valuations.

I'm not at all convinced that the valuation index predicts with any certainty what constitutes a bubble. A bubble is defined also by its high sensitivity to shocks and sentiments, not just by some simplified ratio of price/ave(rent+income). There are many kinds of shocks to consider, to interest, to income, to equity, indeed to price itself, to rents, to outlook, to stocks, to non-local housing markets, to lending, to liquidity, and probably more that I did not think of right now.

Note to self: valuation indices based on income-only and rent-only are here:

https://piggington.com/valuation_update_...

Submitted by Rich Toscano on June 11, 2017 - 4:54pm.

Well, I guess this is part of the problem, the word "bubble" doesn't have a hard and fast definition. With that said, I disagree with your specific definition:

"A bubble is defined also by its high sensitivity to shocks and sentiments"

All markets are vulnerable to shocks and changes in sentiment. Overpriced ones, even more so. But I am trying to distinguish between a "merely" overpriced market, and one that is a "bubble" characterized by manic sentiment and rare levels of overvaluation. To define a bubble by just being vulnerable to shocks -- which, to some degree, all markets are -- seems way too broad to me.

And please note that I don't disagree with the premise that the SD housing market is vulnerable to shocks. A steep rate rise, in particular, could potentially be pretty damaging. But like I said, all markets are subject to shocks, and overpriced ones (which this is) are especially sensitive. But that doesn't necessarily make them a "bubble" in the way I am trying to distinguish it (for instance, in the manner that SD housing 2005 was a true bubble).

Submitted by gzz on June 13, 2017 - 3:21pm.

It is a bubble if people are buying only with the hope to sell it later to a greater fool.

Right now, however, prices are actually quite low compared to rents for both investors and primary home buyers.

Submitted by gzz on June 13, 2017 - 3:29pm.

Rich, the US economy, with year after year of sub-2% inflation and stagnant working-age population, looks a lot more like Japan of 1992 (before 25 years and counting of near or below 0% rates) than the USA of 1970-1980 (high inflation and rapidly growing workforce).

Submitted by spdrun on June 13, 2017 - 8:08pm.

gzz - it's a bubble if people are holding with the hope of massively increased prices. Also, no one knows if rents are rationally valued.

Submitted by Rich Toscano on June 13, 2017 - 8:54pm.

spdrun wrote:
Also, no one knows if rents are rationally valued.

Why would they not be? It's a market set solely by supply and demand (unlike home purchases, which also has the speculative factor of anticipated future price changes).

Submitted by gzz on June 14, 2017 - 2:08pm.

Rich Toscano wrote:
spdrun wrote:
Also, no one knows if rents are rationally valued.

Why would they not be? It's a market set solely by supply and demand (unlike home purchases, which also has the speculative factor of anticipated future price changes).

I agree, a rent bubble makes as much sense as a bubble in the price of a haircut. There is no speculative element when people rent a house.*

I think what he really means is more "The San Diego economy will fall into the crapper soon, so rents will fall and so will housing prices."

*Exception for cities with rent control rights. If you think rents will go way up in SF/NYC, you might rent something bigger than you want now to lock in the price for the future or speculate on future landlord buy-out payment.

Submitted by spdrun on June 14, 2017 - 6:14pm.

Take it in context. Let's say rents have been increasing 10% per annum. Landlords come to expect 10% more every years. Suddenly, they end up asking 10-20% more than the market can handle for a longer duration. Tenants are forced into debt for other things in order to make their rent. That debt has to be repaid, reducing their FUTURE ability to pay.

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