Buying a home in San Diego will set you back.
This is not exactly breaking news. But it’s useful to quantify exactly how expensive San Diego housing is, and how this has changed over the years.
A good way to measure housing expensiveness is to compare home prices with the two main factors that typically drive them: local rents and incomes.
• Rents tell us how much it costs to put a roof over one’s head without buying a home. (They also measure how much rental income can be expected by real estate investors.)
• Incomes tell us how much San Diegans earn, which correlates to how much they are able to spend on housing.
Between them, these two numbers capture most of the important elements that influence home prices, including population, housing supply and economic conditions. They can, therefore, give us a ballpark idea of how much it should cost to buy a San Diego home.
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Thank you for the excellent article, Rich. Is it reasonable that the valuation index returns to the historical mean by rents and incomes rising, instead of home prices coming down? Did that trend ever occur in the past 'corrections'? Thanks for the insights!
@Bryan S Yes, that is very reasonable, and it has happened before in the early 1980s.
I've been following your site for many years, and I find it incredibly useful. But I have a few questions that might clarify things for me.
1) In the San Diego Home Valuation Index, why are rent and income equally weighted? Why are they even lumped together? Does making 2 separate valuations show anything different or valuable?
2) Do you have a chart showing the San Diego Home Valuation Index, but using monthly mortgage payment, vice home prices? It would be interesting to see how closely the SDHVI tracks with monthly mortgage payment? If low rates are here to stay (like most economists tell us - I can't/won't support or refute their claims) then we should expect a new normal well above the historical mean.
Thank you for providing such a valuable service
@bryan munson Sorry for the delay but I didn't see this until just now! Thanks for the comments.
1. They are lumped together, and equally weighted, just as a way to capture all the info in a single indicator. I used to separate them out, but price-to-income and price-to-rent ratios end up looking so similar that I didn't see much value in keeping them separate. If you are curious to see what they look like separately, I just put that up here: https://piggington.com/valuation_update_bonus_graphs
2. Just put up a new VOSD article on that topic here: http://www.voiceofsandiego.org/topics/news/monthly-home-payments-lower-than-average-doesnt-assure-higher-prices/
Should also use the national median price for a home for the past 100 years adjusted for inflation. The charts displayed price between 80 to 120% except it went up to 200% in 2005. That why I was telling people in 2009 a 40% drop. I was close. Currently its back up to 140-150%. So we are still overvalued by 20 to 25%.
Grew up in San Diego in the 50's to parent born here. Always heard home prices never fall in San Diego. People do not remember early 1990s or early 60's. But some guy did his thesis on San Diego home prices since 1900. Prices dropped 30% during the depression.
Good luck all of north county over one million along the coastal cities when interest rates go back to 6-7%. Can the upper middle class afford one million dollar loan at 6%-$6000 per month or 7%-6,650 per month. We shall see in the next few years.
Mike Meyer--South Mission beach
Rich, Is there a technical reason you use a historical mean for the entire time period instead of some kind of rolling average or "best line fit" that might show a trend? To my eyes a line of best fit would show some upward trend, even if you capped the bubble somewhat.
@vintagevoice Good question and one I've thought about too. It's plausible that there might be an uptrend to this series over the long haul. But, a trend line would be seriously distorted by the massive bubble spike in valuations. And I don't think a moving average is much help, because all that would matter is whether the average included the bubble period or not. So I ended up just using the median to give a visual on what's been the typical, middle of the road valuation over time. I tried to address the possibility of a trend higher in the article text, but this is a topic I'll look at more closely in the future.
I don't understand the hand-waiving away of the relevance of interest rates. "The monthly payment on the median San Diego home is actually lower than the historic norm." But... what? You cite some reasons to dismiss it, granted, but they look pretty thin. Prices respond to the cost of money.