Historical Home Prices, Payments, Rents, and Rates

The first chart below displays the percent change in San Diego home prices, payments, and rents since 1977. The second chart displays the same information adjusted for inflation. Mortgage rates are indicated on the right axis in both charts.

As I've discussed before, I tend to de-emphasize monthly payments as a good measure of home valuation or, more to the point, as a predictor of whether current prices can hold up. Without rehashing the whole topic, suffice it to say that the following two scenarios have very different implications, valuation-wise:

  1. Lifetime high monthly payments concurrent with lifetime high mortgage rates (as happened in the early 80s)
  2. Near-lifetime high monthly payments concurrent with near-lifetime low mortgage rates (as is happening right now)

Nonetheless, even using real monthly payments as a proxy for valuation, home prices have clearly overshot their fundamentals. Consider the various changes since the housing market bottomed in 1997:

Change since 1997
Real Rents
20%
Real Home Prices
138%
Real Monthly Payments
112%

Some of that home price rise can be attributed to "catch-up" after homes became undervalued in the mid-90s. However, look at what's happened since rates bottomed out in 2003 -- a year in which homes were already quite richly valued:

Change since 2003
Real Rents
1%
Real Home Prices
32%
Real Monthly Payments
41%

That, my friends, is pure speculative mania.