San Diego Housing Market News and Analysis

Below is a San Diego housing update my financial planning firm sent to our clients and friends. (If you'd like to sign up for our quarterly updates, you can do so here). Stick around for some bonus pigg-only graphs at the end.

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Measuring housing expensiveness

We all know that buying a home in San Diego costs a lot more than in most cities. But that's always been the case, and probably always will be, because San Diego is such a desirable place to live. More interesting is the question of how expensive San Diego is compared to its own history. This can tell us whether prices are out of whack even after adjusting for the desirability factor.

A good way to measure housing expensiveness is to compare home prices to local rents and incomes. Rents tell us how much it costs to live in San Diego as a non-owner, while incomes show how much money San Diegans have to spend on housing.[1] By comparing home prices to rents and incomes, we can get an idea of their cheapness or expensiveness relative to the economic factors that typically drive them. (This is also known as their "valuation").

Here's a chart of San Diego housing valuation since the late 1970s:

 

There was a bit of in increase in months of inventory in June, but it seems pretty par for the course for this time of year:


If rates stay nice and low, I expect that the trajectory of the 2019 line will end up looking more like 2016-17 than 2018. (And if they don't... well then it's probably the 2018 route).

Here's a look at price changes vs. inverted month of inventory, still tracking quite well on the assumption that 2.5 months is the "new normal" equilibrium level of inventory.


Price-wise, we are right back at peak levels, in nominal terms.


In valuation terms we are still below last year's peak, but I will soon have more on that. In the meantime, more graphs below!

Mostly just charts this month, friends. A couple quick observations:

- The market was pretty strong again but weakened from the prior month, in terms of both price and months of inventory... this chart sums that up best.


- But interest rates have dropped further, which should be a tailwind in the coming months (if the new low level persists)


- FWIW prices are (slightly) down year over year in real and nominal terms -- but the comparison will get easier starting in July, which is when prices started declining last year. Between that and the drop in rates (again, assuming that persists), I am guessing we'll be back in positive y-o-y territory soon.


More graphs below!

April was another strong month, as prices firmed up further and months of inventory decreased. This latter point is best illustrated on a graph that compares monthly changes... note how late last year -- take December for instance -- inventory was much higher than a year earlier. Now, it is only slightly higher than the year-ago level:


The 3-month average of single family price/square foot also rose again, and prices appear to be nearing last year's peak:


Despite this, the year-over-year price comparison weakened, because April 2018 was a tougher month to compare against. (The peak for this series was in June, so comparisons will continue to get tougher for a couple months):

Last month I introduced a chart of the year-over-year price change, and I belatedly realized that I should have included an inflation adjustment. That is after all the more relevant figure -- if your house's price went up 1%, but inflation rose by 2%, your house is now worth less than it was in purchasing power terms, which what actually matters.

And on that note, the real "home price" (actually 3-month average of the single family price per square foot) did indeed go ever-so-slightly negative last month. This marks the first time in negative territory since 2012:


Weep not for the market, though, as it has shown some resilience of late, with months of inventory declining:


... and prices bouncing a bit:

After declining into the end of the year, prices have gained a bit:


December was weak enough, however, that the 3 month average single-family pr/sqft was still a new low. Note that the current correction is unlike anything seen since the housing bull market began (which I date Jan 2012, as that was the date of the inflation-adjusted low).


Here's a fun new graph... the year-over-year change in the single family home price per square foot (I used a 3-month average to smooth it out a bit):

Hey all -- few words this month, and mostly charts. I will note the two stats I called out in the title...

1. Months of inventory is highest since 2011 (which was right at the tail end of the bust).


December is always highest but you can see the big increase over recent years:


2. The higher inventory seems to have started impacting prices. Single family price/square foot was down 3.3% for the month. Here's how that looks on the Case-Shiller proxy (3-month average of single-family price/sqft):

Months of inventory notched up another big increase in November:


This measure of supply vs. demand is now 80% above where it was a year ago. Granted, that was coming off a very low level. But it just goes to show how much, and how quickly, things have changed.

Here's a longer term view to put that in perspective. It's not too far above late-2013 and 2014 levels. But it's quite a bit above what the market had gotten to recently -- and it is the highest since the bust ended. (In my view the bust ended in January 2012, which was when prices reached their inflation-adjusted low).

October looked pretty similar to September... for commentary, see the September writeup. Updated graphs below.

Also, check out this article arguing that there is a "new normal" level of housing inventory thanks to various changes in the industry (including technology). This supports the logic behind the "new normal" months-of-inventory vs. price change graph, as initially suggested by gzz. The article suggests that 4 months of inventory is the new level; just fitting it via eyeball in San Diego it looks to have been closer to 2.5 months in recent years. But that could change in the next downturn.