San Diego Housing Market News and Analysis
Valuation update: affordability just got a lot uglier
Submitted by Rich Toscano on March 21, 2022 - 8:56pm
The price valuation index looks not too different from the last update. It's crept up a bit, but it in the same (albeit historically quite high) ballpark.
The monthly payment index, on the other hand, looks quite different thanks to the recent pop in rates. The red line below shows that the ratio of monthly payments to local incomes and rents has exceeded its post-crash highs, and is now at a level last seen in mid-2003.
Up until recently, you could make the argument that despite sky-high purchase prices, low rates were keeping the monthly nut pretty reasonable. It's a lot harder to do so now, and with inflation still running in the high single digits, there seems to be a good chance that it will become harder yet.
This seems unhealthy to me. I realize that there is nothing for sale right now, and that the mismatch of demand and supply is pressuring prices upward. Further out, I worry about the sustainability of these prices and this level of affordability. I will note that we've blown right past the affordability level that, when reached in 2018, ushered in a mild housing downturn that lasted until rates declined again.
I do think there is something to the idea that San Diego has had a permanent shift upward in value due to the remote work revolution. I suspect that might count for around 10% of the price increase, though.* If you back that extra 10% out, we are just a few percent above the historical median for affordability, although we are almost 10% above the levels that coincided with the 2018 slowdown.
On a gloomier note, I still suspect there is a lot of bubble money giving things a boost that, from the looks of things, may not be long for this world.
There are a lot of moving parts and much that is unknown (as ever). But we do know this: valuations are really high, and the "it's ok, rates are low" offset has just taken a major hit.
* I came up with this 10% number based on this very sophisticated methodology: since Jan 2020, home prices in San Diego have gone up 10% more than the nationwide average (per Case-Shiller).
** Also note - I took a couple of liberties with the above graphs. First, I am starting to re-integrate the use of CPI rent. I just felt weird switching from a measure of new leases (Zillow Observed Rent Index) to all leases (CPI)... it's kind of apples and oranges. On the other hand, due to the eviction moratorium and the speed of the increase in rents, it really just wasn't showing up in CPI. So what I've done is to blend the two together, using only ZORI at first, and blending in CPI in an increasing proportion so that it will be all CPI again by mid-2023. I figure 3+ years should be enough for CPI to have fully digested whatever is going on.
The second thing is that for mortgage rates, I used the most recent weekly figure for the last observation in the chart (as opposed to using the monthly figure for Feburary). This is kind of similar to the issue with rents -- rates changed so quickly that we'd be missing out on info if we used the usually lagged/smoothed sources, so I wanted to use the latest data available.
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