Earlier this week, Kelly Bennett gave us the lowdown on the Case-Shiller home price data for November.  I'm going to just add a couple of things.

First, I have updated the requisite post-peak chart, which as always can be enlarged by clicking on the image to the upper left of this entry.

Second, the chart shows that the high-priced tier of the index (composed of the most expensive one-third of homes sold during the measurement period) continued to languish as lesser-priced homes rebounded further.

And third, as Kelly noted, the Case-Shiller index produced its first positive year-over-year comparison since the price crash.  This is no surprise; the median price data suggested that it would do so.  But while expected, it is still a somewhat momentous event from the standpoint of historical precedent.  When annual price changes have flipped from negative to positive, or vice-versa, in the past, it has often heralded a change in the long-term price trend.  I wrote all about this -- with requisite caveats and considerations, of course -- back in November. 

-- RICH TOSCANO

Now that 2009 has drawn to a close, let's check in on whether San Diego homes on the whole are underpriced, overpriced, or somewhere in between.

The comparison of home prices with incomes and rents has been a crucial part of my analysis since my first voiceofsandiego.org article appeared in 2005.  The idea is that rents and incomes are the fundamental underpinnings that determine fair value for local housing.  Incomes are what people use to buy houses, and rents represent the cost of simply putting a San Diego roof over one's head.  San Diego is certainly a desirable place to live, but this has long been the case, and this fact has been reflected in local rents and in the high proportion of their wages that people are willing to put towards owning homes.  Unless San Diego's level of desirability changes drastically, local home prices should be expected to gravitate towards a somewhat consistent relationship with incomes and rents.

The data bears this out.  While there have been forays into overvalued and undervalued territory (and one particularly egregious swing into overvalued territory), the ratios of San Diego homes prices to incomes and rents have always eventually reverted back to normalcy.

After the history-making speculative housing bubble that played out earlier in the decade, "normal" is more or less where housing valuations stand now.

This can be seen in the following chart, which displays the ratio of San Diego home prices to San Diego per capita income going back over three decades.  Despite the 2009 bounce in prices, home valuations are still right in the middle of the range that prevailed before previously unheard-of levels of easy credit and real estate speculation drove prices into the stratosphere during this past cycle.

The home price-to-rent ratio displays a similar pattern.

Note that while home valuations are within the realm of normalcy, they are far from being cheap.  The price-to-income ratio would have to drop by 22 percent from here to reach the same level it reached at the worst of the 1990s housing bust.  The price-to-rent ratio would have to drop a smaller 14 percent, but it would take a 24 percent decline for this ratio to equal its mid-1980s low.

As always, it should be noted that I am using a countywide price measure that lumps together all the different regions of San Diego County.  This is an important point, because many of San Diego's sub-markets have behaved quite differently during the housing bust.  And the ratios don't make any allowance for today's unusual market conditions, such as shadow inventory and the fact that the government has moved heaven and earth to forestall the decline in home prices.

But looking at San Diego in aggregate, and based strictly on historical relationships with incomes and rents, local homes are neither particularly cheap nor particularly expensive.

-- RICH TOSCANO

It feels like I've been writing about "shadow inventory" -- homes that are in foreclosure but haven't hit the market yet -- forever.  Yet no flood of foreclosures has yet inundated the market, and as a matter of fact, inventory has been quite scarce lately.  Is there anything to this shadow inventory concept?

As Kelly Bennett documented in a recent blog entry, the answer is yes.  Kelly noted as of Tuesday, there were 19,453 San Diego homes that were in foreclosure but that were not yet listed for sale.  That, my friends, is your shadow inventory.

For purely illustrative purposes, let's try to understand what the effect would be if all these homes in foreclosure were to suddenly hit the market.  That's certainly not going to happen, and as I'll discuss below, these homes may never come on the market at all.  But this approach helps understand the scale of what lurks in the shadows.

• There are currently 11,976 homes listed for sale in San Diego.  If all the shadow inventory were to hit the market, inventory would increase by 162 percent to 31,429.
• The 11,976 figure in the prior bullet includes active inventory as well as inventory that is marked "contingent," meaning that the property is a short sale or the like that has an accepted offer that is awaiting lender approval (thus, the property is not really available for sale).  Using only the active inventory of 7,964 homes, shadow inventory would swell the number of homes for sale by 244 percent.
• Using the average number of sales over the past year, releasing the shadow inventory into the wild would add 7.3 months' worth of inventory.  By comparison, in November there were 4.6 months of inventory if you count both active and contingent homes, and only 3.0 months if you count just active listings.  So adding all that shadow inventory would increase the number of homes actively for sale from 3 months' worth to 10.3 months' worth -- more than a three-fold increase.

Shadow inventory is very real, then, in the sense that there are foreclosed (but not yet for sale) homes out there in numbers that would have a substantial impact on the county's housing supply if they were to come onto the market.

Whether that will actually happen is another question entirely.  So far, foreclosed homes are only making it to the market in a trickle.  The rationale that banks are too swamped to process foreclosures seemed plausible at first, but this has gone on so long that I am increasingly skeptical of it.  So I can only assume that the foreclosures are being held back by some combination of moratoria and other bailout programs (or hope for more of the same), "extend and pretend" (in which lenders put off foreclosure in an attempt to prop up the paper value of their mortgage assets), and political pressure from the folks who run the bailout printing press.

As with other aspects of the housing market, this has become a largely political issue and is accordingly difficult to forecast.  But I think it's a fairly safe bet that the politicians will find new and exciting ways to throw money at the situation.  (To this point, local housing analyst Ramsey Su has conjectured that the Christmas Eve lifting of the limits on how much money the government will provide to Fannie Mae and Freddie Mac is a prelude to widespread mortgage principal reduction by the two mortgage giants).

It's tough to know, then, how many of those 19,453 homes will complete the foreclosure process and make it onto the market.  And for the ones that do, we don't know over what timeframe it will happen.  It's certainly within the realm of possibility that the government could borrow, print, and spend enough money to substantially lessen the shadow inventory's potential impact.

It's within the realm of possibility, but not a sure thing.  And there is no doubt that the shadow inventory is out there in great numbers.  Until the path forward is more clear (and regardless of whether prices are rising right now) shadow inventory is a factor that should not be dismissed or ignored.

-- RICH TOSCANO

I wrote Monday about the increase in employment at San Diego businesses between October and November.  I also discussed how the year-over-year change in payroll employment, while still firmly negative, had become steadily less so in recent months.

Today we'll look at the other job survey I've been writing about of late.  While the "establishment survey" discussed yesterday concerns employment at San Diego businesses, today's "household survey" measures employment among people living in San Diego regardless of where they are employed.  I suspect that the household survey provides a more lagging read on local employment trends, for reasons previously outlined, but it's still worth looking at to see if we can make sense of any divergences that arise.

As it turns out, the November household survey provided a similar (if more muted) message to the establishment survey.  Employment among county residents increased for the month, though it did so by a wee .25 percent.  And for the first time in 2009, as the accompanying chart shows, the year-over-year decline in San Diego household employment got a little smaller.

-- RICH TOSCANO

Earlier this week, Kelly Bennett gave us the lowdown on the Case-Shiller home price data for November.  I'm going to just add a couple of things.

First, I have updated the requisite post-peak chart, which as always can be enlarged by clicking on the image to the upper left of this entry.

Second, the chart shows that the high-priced tier of the index (composed of the most expensive one-third of homes sold during the measurement period) continued to languish as lesser-priced homes rebounded further.

And third, as Kelly noted, the Case-Shiller index produced its first positive year-over-year comparison since the price crash.  This is no surprise; the median price data suggested that it would do so.  But while expected, it is still a somewhat momentous event from the standpoint of historical precedent.  When annual price changes have flipped from negative to positive, or vice-versa, in the past, it has often heralded a change in the long-term price trend.  I wrote all about this -- with requisite caveats and considerations, of course -- back in November. 

-- RICH TOSCANO

Now that 2009 has drawn to a close, let's check in on whether San Diego homes on the whole are underpriced, overpriced, or somewhere in between.

The comparison of home prices with incomes and rents has been a crucial part of my analysis since my first voiceofsandiego.org article appeared in 2005.  The idea is that rents and incomes are the fundamental underpinnings that determine fair value for local housing.  Incomes are what people use to buy houses, and rents represent the cost of simply putting a San Diego roof over one's head.  San Diego is certainly a desirable place to live, but this has long been the case, and this fact has been reflected in local rents and in the high proportion of their wages that people are willing to put towards owning homes.  Unless San Diego's level of desirability changes drastically, local home prices should be expected to gravitate towards a somewhat consistent relationship with incomes and rents.

The data bears this out.  While there have been forays into overvalued and undervalued territory (and one particularly egregious swing into overvalued territory), the ratios of San Diego homes prices to incomes and rents have always eventually reverted back to normalcy.

After the history-making speculative housing bubble that played out earlier in the decade, "normal" is more or less where housing valuations stand now.

This can be seen in the following chart, which displays the ratio of San Diego home prices to San Diego per capita income going back over three decades.  Despite the 2009 bounce in prices, home valuations are still right in the middle of the range that prevailed before previously unheard-of levels of easy credit and real estate speculation drove prices into the stratosphere during this past cycle.

The home price-to-rent ratio displays a similar pattern.

Note that while home valuations are within the realm of normalcy, they are far from being cheap.  The price-to-income ratio would have to drop by 22 percent from here to reach the same level it reached at the worst of the 1990s housing bust.  The price-to-rent ratio would have to drop a smaller 14 percent, but it would take a 24 percent decline for this ratio to equal its mid-1980s low.

As always, it should be noted that I am using a countywide price measure that lumps together all the different regions of San Diego County.  This is an important point, because many of San Diego's sub-markets have behaved quite differently during the housing bust.  And the ratios don't make any allowance for today's unusual market conditions, such as shadow inventory and the fact that the government has moved heaven and earth to forestall the decline in home prices.

But looking at San Diego in aggregate, and based strictly on historical relationships with incomes and rents, local homes are neither particularly cheap nor particularly expensive.

-- RICH TOSCANO

It feels like I've been writing about "shadow inventory" -- homes that are in foreclosure but haven't hit the market yet -- forever.  Yet no flood of foreclosures has yet inundated the market, and as a matter of fact, inventory has been quite scarce lately.  Is there anything to this shadow inventory concept?

As Kelly Bennett documented in a recent blog entry, the answer is yes.  Kelly noted as of Tuesday, there were 19,453 San Diego homes that were in foreclosure but that were not yet listed for sale.  That, my friends, is your shadow inventory.

For purely illustrative purposes, let's try to understand what the effect would be if all these homes in foreclosure were to suddenly hit the market.  That's certainly not going to happen, and as I'll discuss below, these homes may never come on the market at all.  But this approach helps understand the scale of what lurks in the shadows.

• There are currently 11,976 homes listed for sale in San Diego.  If all the shadow inventory were to hit the market, inventory would increase by 162 percent to 31,429.
• The 11,976 figure in the prior bullet includes active inventory as well as inventory that is marked "contingent," meaning that the property is a short sale or the like that has an accepted offer that is awaiting lender approval (thus, the property is not really available for sale).  Using only the active inventory of 7,964 homes, shadow inventory would swell the number of homes for sale by 244 percent.
• Using the average number of sales over the past year, releasing the shadow inventory into the wild would add 7.3 months' worth of inventory.  By comparison, in November there were 4.6 months of inventory if you count both active and contingent homes, and only 3.0 months if you count just active listings.  So adding all that shadow inventory would increase the number of homes actively for sale from 3 months' worth to 10.3 months' worth -- more than a three-fold increase.

Shadow inventory is very real, then, in the sense that there are foreclosed (but not yet for sale) homes out there in numbers that would have a substantial impact on the county's housing supply if they were to come onto the market.

Whether that will actually happen is another question entirely.  So far, foreclosed homes are only making it to the market in a trickle.  The rationale that banks are too swamped to process foreclosures seemed plausible at first, but this has gone on so long that I am increasingly skeptical of it.  So I can only assume that the foreclosures are being held back by some combination of moratoria and other bailout programs (or hope for more of the same), "extend and pretend" (in which lenders put off foreclosure in an attempt to prop up the paper value of their mortgage assets), and political pressure from the folks who run the bailout printing press.

As with other aspects of the housing market, this has become a largely political issue and is accordingly difficult to forecast.  But I think it's a fairly safe bet that the politicians will find new and exciting ways to throw money at the situation.  (To this point, local housing analyst Ramsey Su has conjectured that the Christmas Eve lifting of the limits on how much money the government will provide to Fannie Mae and Freddie Mac is a prelude to widespread mortgage principal reduction by the two mortgage giants).

It's tough to know, then, how many of those 19,453 homes will complete the foreclosure process and make it onto the market.  And for the ones that do, we don't know over what timeframe it will happen.  It's certainly within the realm of possibility that the government could borrow, print, and spend enough money to substantially lessen the shadow inventory's potential impact.

It's within the realm of possibility, but not a sure thing.  And there is no doubt that the shadow inventory is out there in great numbers.  Until the path forward is more clear (and regardless of whether prices are rising right now) shadow inventory is a factor that should not be dismissed or ignored.

-- RICH TOSCANO

I wrote Monday about the increase in employment at San Diego businesses between October and November.  I also discussed how the year-over-year change in payroll employment, while still firmly negative, had become steadily less so in recent months.

Today we'll look at the other job survey I've been writing about of late.  While the "establishment survey" discussed yesterday concerns employment at San Diego businesses, today's "household survey" measures employment among people living in San Diego regardless of where they are employed.  I suspect that the household survey provides a more lagging read on local employment trends, for reasons previously outlined, but it's still worth looking at to see if we can make sense of any divergences that arise.

As it turns out, the November household survey provided a similar (if more muted) message to the establishment survey.  Employment among county residents increased for the month, though it did so by a wee .25 percent.  And for the first time in 2009, as the accompanying chart shows, the year-over-year decline in San Diego household employment got a little smaller.

-- RICH TOSCANO