I just put up a new piece at Voice of San Diego discussing the
following:
- Despite high home valuations, San Diego monthly payments (as
compared
to local rents and incomes) are on the low side of history - While it seems intuitive to believe that interest rates should be
a
big driver of home prices, this has historically not been the case. I
posit several reasons why this might be.
Why
High Home Prices Don’t Necessarily Mean High Home Payments
I don’t think we need to
I don’t think we need to overthink this too much or try to make inferences from noisy data sets with a lot of other important variables and shocks (eg, post cold war military cuts, 2000’s fraud and elimination of lending standards).
In the end, a house that rents for $2000 will go up in price with lower rates as surely as a bond that pays $2000 will go up. What makes San Diego RE such a good investment for small investors is we get subsidized loans and that home prices are semi sticky so do not adjust in price as fast as super liquid and rational bond rates, so it is possible to catch the slow-moving rate-led increase in housing prices. And your payment index chart still shows values have a long way up to go.
My general model here, that sticky prices mean RE prices still have not yet adjusted to low rates, is strongly supported by ultra low inventory levels.
The article also made me wonder what a real mortgage interest rate and real price change graph would look like. It would be fun to know the highest and lowest real 30 year rate.
Lending standards we have now
Lending standards we have now I think are smoothing out or “penting up” price increases into 2018 and after. Prices were so crazy low in 2012 and 2013 they could go up big from cash investors and bulk buyers. Since then the market has shifted toward financed buyers, and banks just don’t like writing loans at more than 10% above last year’s comps. Sellers see this, realize buyers can’t pay the house’s fair value given its rent, so they keep it off market and wait, again leading to inventory levels that in looser financing eras would see 20% price increases.