San Diego Housing Market News and Analysis
This Just In: San Diego Homes are Overpriced
Submitted by Rich Toscano on March 4, 2008 - 11:04am
I've updated long-term charts of the ratios of San Diego home prices to rents and incomes:
Despite the steep decline to date, San Diego homes are still quite overpriced based on their relationships to both rents and incomes, around which they mean-reverted in a fairly well-behaved manner up until the late great 2000s bubble. To put some specific percentages on it, the price-to-income ratio would have to fall 13% from here just to get down to the level of the 1990 bubble peak. The price-to-rent ratio would have to fall 20% from here to get to the 1990 peak.
To get to the post-bubble 1996 trough, the price-to-income ratio would have to fall 40% from here and the price-to-rent ratio 36%. If we are to get back to 1996 valuations, these ratios suggest that the decline is about halfway over in magnitude.
Whenever I put out charts like this, some people object that prices should be higher in comparison to incomes and rents because rates are lower. I can understand the rationale but the facts don't really seem to support this contention. Check out the p/i graph with 30-year fixed mortgage rates overlaid:
In the past two cycles, the p/i ratio peaked at pretty much the exact same spot despite the fact that rates fell subtantially between the first and second peaks. And despite much lower rates during the second trough than the first, the second trough actually saw the p/i ratio fall even lower than it had the first time around.
The peaks also look similar with the p/r ratio, although the second trough bottomed out higher than the first:
The p/r ratio declined less than the p/i ratio because rents declined during the 1990s bust while incomes continued to rise. It's not that home prices stopped falling; it's just that rents fell too. This is probably due more to the overbuilding for which the 1990s boom was so famous than to low rates.
Of course, both ratios went parabolic during a period of very low rates. But given that rates weren't a big driving factor of home valuations in the past, it seems more likely that something else was at work during the latest bubble. For that honor I nominate the previously unimaginable orgy of reckless underwriting enabled by the great securitization boom.
Now that EZ-credit has left the building, it's reasonable to assume that these ratios may eventually return to something approaching historical normalcy.
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