Bigger Boom, Bigger Bust

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The Union-Tribune today ran a very gloomy article on the latest DataQuick housing numbers, a centerpiece of which was the fact that San Diego's median home price has already fallen farther than it did during the entirety of the early-1990s housing bust.

The news is not quite so grim just yet, however. Kelly Bennet performed the same comparison using the Case-Shiller Home Price Index and found that according to that measure, prices have not yet fallen as much as they did in the 1990s. The median has fallen 15 percent so far, compared to 12 percent during the 1990s downturn. The HPI, on the other hand, has fallen just 11 percent during this bust compared to over 17 percent in the last one.

As Kelly points out, the one problem with this comparison is that the latest median figure describes November's prices, whereas the HPI is only current through September. Moreover, that September number comprises activity not just in September but in July and August as well. Given that the price decline has really picked up the pace in the last couple of months, I am quite confident that the 11 percent fall in the HPI as of September is understating the total price decline as of right now, and that the HPI will do some catching up to the median price in the months ahead.

Nonetheless, the point remains that the current home price decline is not yet steeper than what we saw in the 1990s.

But nobody should be surprised if prices decline more than they did last time around. A while back I compared changes in home "expensiveness" by dividing the yearly average of the Case-Shiller HPI by that year's per capita income for San Diego. Using this home-price-to-income metric, it turned out that the late 1980s housing boom lasted 5 years and saw San Diego homes get 36 percent more expensive.

The late, great housing bubble, in contrast, lasted 8 years and saw the home price to income ratio rise by 118 percent.

That is an amazing difference -- the price to income ratio rose almost three times as much during this boom as it did during the prior one. It only makes sense that the ensuing bust will be bigger too.

-- RICH TOSCANO