San Diego Housing Market News and Analysis
Shambling pretty damn far afield from affordability, at this point
Submitted by Rich Toscano on May 21, 2018 - 1:28pm
Time for a valuation update! These graphs should be familiar to regular Piggs; for anyone who'd like some background please see these two Voice of San Diego articles: how to measure housing valutions and how mortgage rates impact prices.
Onto the graphs... here is San Diego home valuation index, measuring how expensive homes are compared to local incomes and rents:
Friends, this thing is getting pricey. Valuations are still far short of peak levels, when they reached 72% above the historical median. But at the current 28% above the median, we are well above the highest valuation achieved outside last decade's epic housing bubble.
But then there's that mortgage rate thing... while rates are far off the lows in a relative sense, they are still very low historically. The monthly payment index (which is just like the valuation index, but measures monthly payments instead of home prices) remains below its historical median:
So we've got increasingly expensive purchase prices, way higher than outside the bubble and even approaching early-bubble levels. But rates are still low enough that monthly payments are reasonable compared to local rents and incomes. Which is is the same as it's been for a while now, just... more.
The relationship between rates and prices is more nuanced than many people believe, as I discussed in the second article linked above. But I think it's reasonable to believe that the prolonged period of low rates has played a big role in helping get valuations up to these levels. If rates were to return to more normal-ish levels, that could very well pressure valuations down towards more normal levels as well.
It's possibly worth zooming in on that recent rise in the monthly payment ratio to see what this might look like. It doesn't look like much on the graph, but it was pretty big relatively speaking. Just since September, mortgage rate increases have driven monthly payments up by over 10%, even if you hold everything else else equal. You can see where that would start to bite, were it to keep happening.
That's the problem with citing low rates as an excuse for high valuations (in real estate, and any other asset class): it only works for as long as rates stay low.
Don't call it a bubble... (yet)
I acknowledge that the purchase prices are getting pretty extravagant, but there are two counters to the idea that it is a full-on bubble:
First, the rate thing. I think that is a mitigating circumstance, as described above -- albeit one that could change.
Second, you have to distinguish between a market that's "overpriced" and "a bubble." Markets get overpriced all the time; cycling between expensive and cheap is the natural order of things. But a bubble is really a special situation in which people are acting totally irrationally and driving valuations to extremes, so that the only plausible outcome is a price crash. I just don't see that here. Not yet, anyway!
Taking a quantitative pass at the question, the investment firm GMO defines a bubble as an asset that's risen 2 standard deviations above its historical valuation -- an arbitrary but reasonable criteria. From here, valuations (not prices, but valuations) would have to rise a further 13% to meet GMO's bubble threshold:
So we aren't there yet, especially if you factor rates into the equation. But we aren't far from it either!
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