Housing Is Unaffordable — for Now

Thursday, February 02, 2006 | Two weeks ago I wrote a column making the case that, contrary to highly popular belief, there is no housing shortage in San Diego. I wasn’t surprised to get some hostile letters in response – these days, writing an opinion piece about housing is practically begging for hate mail.

What surprised me, though, was that the angry letters all took me to task for making a claim that I never made at all.

I would summarize the letters thusly:

“Maybe there are plenty of houses available for the wealthy, but there is a shortage of AFFORDABLE housing. PS: You’re a jerk.”

Sounds great – except that the article wasn’t about “affordable housing” at all. It was about the number of people in San Diego as compared to the number of houses.

The conventional wisdom among both real estate industry insiders and the populace at large goes something like this:

– San Diego has not built enough houses to support population growth.

The intent of my column was to show that there is no data to support this line of reasoning. The San Diego housing supply has more than kept pace with population growth in recent years. Therefore, the sharp increase in home prices is not explained by a housing shortage as is widely believed.

That, folks, was the point. Whether or not housing is sufficiently “affordable” is an entirely different topic.

As it happens, I entirely agree that there is a severe housing affordability problem in San Diego. Put another way, San Diego housing is overpriced. Really, really overpriced.

Have a look at the graph accompanying this article: the ratio of San Diego’s median home price to San Diego’s per capita income is far higher than it has ever been. Even at the very peak of the late-1980s housing bubble, people were paying about 10 times per capita income to purchase a median-priced home, compared to almost 15 times per capita income now.

This represents an increase of almost 50 percent over the prior record peak – and almost double the amount paid at the bottom of the ensuing mid-1990s housing bust.

Like I said, I could not agree more with the assertion that San Diego housing is entirely unaffordable. The good news is that the affordability problem is, by its very nature, temporary.

Consider the fact that San Diego scored an eight on the California Association of Realtors’ most recent Affordability Index reading. This means that, assuming a 20-percent down payment and a 30-year fixed-rate loan, only the top 8 percent of San Diego income earners can afford to purchase the median priced home here.

Stop and think about that. Only the highest-paid 8 percent of San Diegans can afford the median-priced home. Does this really seem like a sustainable situation?

As a matter of fact, there are two factors that have allowed home prices to head so high in spite of limited wage growth. One is that people have been making enormous amounts of money via home price appreciation, either by borrowing on their equity or by selling their homes. This has provided a source of “phantom income,” above and beyond wages, that has helped people to make those enormous payments. Unfortunately, this factor is now disappearing as home-price gains have stalled.

The other factor is that people have been able to afford more houses by taking on risky loans that minimize initial payments in exchange for much higher payments down the road. This, too, will cease to be the case as lenders eventually tighten their standards now that the wild price appreciation has run its course.

Home equity withdrawal and loose lending have served as props under the San Diego housing market, allowing home prices to remain far above what local wages would normally allow. Were home prices to remain flat and lenders to substantially tighten their standards, these artificial props under the housing market would be removed, resulting in a situation where very few people were able, let alone willing, to purchase homes at current prices.

We live in an uncertain world, but I say the following with great confidence: unless wages start rising very fast, San Diego home prices will eventually have to fall. One way or another, the housing affordability problem will fix itself.

Rich Toscano is an independent real estate analyst residing in Hillcrest and working in La Jolla. He writes extensively about San Diego housing at Piggington’s Econo-Almanac.