San Diego Housing Market News and Analysis
Monthly housing data: no inventory, prices up, rates up, affordability horrendous
Submitted by Rich Toscano on April 14, 2022 - 1:57pm
As of March, there was still nothing for sale. In fact we hit an all-time (in my data) low in months of inventory:
Prices rose accordingly:
Speaking of things going up really fast -- 30 year mortgage rates just hit 5%. This was at 2.9% 6 months ago! This is a violent move, and because it started from such a low level, has a major impact on monthly payments. I've made a couple charts to try to visualize this impact.
First, here is the year-over-year change in the monthly payment (nominal and inflation-adjusted) on a San Diego home going back about 15 years.
You can see that affordability has taken a massive hit -- even adjusting for inflation, monthly payments are up over 40% over the past year.
There is a seemingly comforting aspect to this chart, though: we experienced a similar rate of change back in 2013, and things were fine after that. This next chart illustrates the problem with that idea. It shows the total change in the San Diego monthly payment since November 2005 (the month the SD Case-Shiller index peaked). At the time that the 2013 surge began, monthly payments were down almost 60% from the bubble peak, in real terms. They had plenty of room to go up while still keeping affordability pretty decent.
This time around, the surge began from a much higher valuation level, so that the inflation-adjusted monthly payment is now where it was at the peak of the housing bubble!
This is not good or healthy. For years I've been saying that while purchase prices were high, low mortgage rates were keeping payments affordable, so perhaps the high valuations were sustainable. Well, the bond market has just spinning roundhouse kicked the legs out from under that argument. Without the "but muh low monthly payments" rationale, the housing market looks a lot more vulnerable to less-than-perfect conditions (to my rheumy, jaded eyes anyway).
I suspect some people are reading this and thinking, "Look at how little inventory there is -- it shows that demand greatly outstrips supply. So what's the problem? Everything is fine."
Well, you could have said that exact same thing in the spring of 2004. (And many did). But what was happening at that time was a short-term mismatch of supply and demand, which people misinterpreted as meaning that no price was too high. But when the drivers of that short-term mismatch went away, valuations dropped back to earth.
I'm definitely not saying that this is the same situation as the bubble (see last year's housing deep dive for more on that topic). My point is that short-term supply-vs-demand, while a great predictor of short-term price changes, doesn't tell you much about the long-term sustainable price level.
(This seems as good a time as any to mention that San Diego's population has declined for the past 3 years in a row. Yes, I know wealthy Bay Area people are moving here and I agree that's a positive for home prices. But that's not the only piece in this puzzle.)
So while the market is woefully undersupplied for the time being, it's also priced for perfection. And because perfection rarely lasts, I have my doubts about the sustainability of this situation. My guess is that if rates don't come down, valuations will have to adjust.
Some more charts below...
* Valuations, as a reminder, can decline due to fundamentals (rents and incomes, in this case) rising faster than prices, or prices declining, or some combination of the two.
** Chart note 1: as in my valuation graphs, for the latest month's data point I used the most up-to-date interest rate, as rates have changed quickly and the latest figure gives the most accurate idea of what current buyers are facing.
*** Chart note 2: Bill McBride recently put out a chart of the y-o-y change to nationwdie monthly payments, but I swear, I was already planning on doing this chart! :-) I'm not stealing your ideas Bill! Well, some of them, but not this particular one. BTW Bill is a must-read for if you care about the housing market.
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