A Year Or Two?

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People now widely acknowledge the once-blasphemous: that the housing market can slow; that home prices can decline; and that both of the above are happening here and now. But we are a cheerful people, apparently, and such admissions are often quickly followed with the disclaimer that the housing market should be back in action soon enough.

Take, for instance, the following quote from El Cajon City Councilman Gary Kendrick, as appearing in a recent U-T article on El Cajon's stalled condo conversion market. Mr. Kendrick is singled out only because this is a very typical example of the many similar proclamations I've heard expressed by assorted authority figures in recent times.

Says Gary:

"It's simply the market cycle that happens every few years, and right now we are in a cooling-off period and that may last a year or two," he said. "Three years from now, people will be saying, 'I wish I bought one of those condo conversions in 2006.'"

I am inspired to trot out my very favorite chart, displaying the ratio of San Diego home prices to incomes.



In past 30 years, this ratio has never started to decline and then stopped a year later. Or even three years later. Nope, in our highly cyclical real estate market, declines in the home price-to-income ratio during this period have never lasted less than six years.

It should be noted that, due to very high inflation at the time, nominal (non-inflation-adjusted) home prices hardly fell at all during that first downturn in the 1980s. Instead, prices just flatlined for several years while inflation raged. So while home prices didn't drop in nominal terms, they did drop compared to everything else.

Unfortunately, the combination of comparitively low inflation and extreme home valuations makes it unlikely that we will see a repeat of the early-80s experience. (Though even if we did, would anyone mourn the lost opportunity to purchase a home during a protracted market stagnation?)

The housing market is an extremely slow-moving beast -- the latest boom lasted almost a decade and saw home prices reach hitherto-unimaginable heights. To assume that home prices will resume their upward march a year or two hence ignores the lessons of history in favor of wishful thinking.

-- RICH TOSCANO