Valuation update

Submitted by Rich Toscano on May 26, 2021 - 3:38pm

I'm still trying to put together a post with some big picture thoughts on the SD housing market. The market's confusing in several ways, and my thoughts are more jumbled than usual.

While I flail away at that, here are some updated valuation charts:

For the uninitiated, these measure the price of San Diego housing as compared to local incomes and rents. (We could separately chart prices vs. incomes and prices vs. rents, but tell a very similar story to each other so I've taken to collapsing them into a single measure).

The first graph shows that valuations -- prices compared to rents and local incomes -- are very high compared to their history, having only been higher during the bubble.

The second graph is one of the confounding factors I mentioned. Instead of measuring home prices, it measures monthly payments, thus incorporating mortgage rates into the picture. And this shows that even though (per the first graph) home prices are quite high, monthly payments are pretty reasonable compared to their history.

The interest rate situation renders the current situation very different from the mid-2000s bubble. If someone can lock in financing at these rates, the monthly nut is not actually that bad, and it may make sense to buy. As opposed to the prior bubble, when the only reason to buy was the belief that valuations would keep rising for the rest of time. This is one of the major reasons I don't consider this a bubble, despite the very lofty valuations.

However, to the extent that low rates are what's allowing prices to stay so high, that puts home prices at risk should rates increase significantly.

More to come at some point soon, I hope...

PS - Data note: up til now I've used the rent component of San Diego CPI to determine rents. However, they have been distorted by eviction moratoriums, resulting in a gap between how much landlords are actually getting (CPI) vs. what they are asking for from new renters. I believe the latter is the more appropriate comparison here. So, I've sub'd in rental stats from Zillow, which appear to more accurately reflect asking rents. For more on this disparity see this chart from this article by inflation analyst Mike Ashton.

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Submitted by gzz on June 30, 2021 - 4:28pm.

Higher rates in the US from 1800-1960 reflected the US had a rapidly growing population and strong technological growth, which in turn caused a large number of highly profitable economic opportunities, which then drove a very strong demand for loanable funds.

Now we have much slower tech growth and no growth in working age population.

The USA of 1900 was comparable to China in 2000.

The USA today is about where Japan was 15 years ago in terms of aging population and very low demand for funds by creditworthy borrowers.

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