Now that we’ve gotten Case-Shiller home price data for the first half of 2008, let’s check back in on the long view of how home prices stack up with their underlying fundamentals: local incomes and rents.

As of the last update to these charts, which included data through December 2007, San Diego home prices — despite having dropped substantially — were still higher in proprtion to rents and incomes than they had been at either of the two prior bubble peaks.

That is no longer the case. At least, not with the home price-to-income ratio, which has now dropped below prior peak levels and could as a result be considered within the bounds historical normalcy (though admittedly very close to the upper bound).

As of June 2008, by the measurement approach described in the above chart, the ratio of home prices to area incomes had dropped 39 percent from the peak was back to a level last seen in January of 2002.

In order to reach to the low point seen during the last housing bust — and I’m not saying that’s necessarily going to happen — the price-to-income ratio would have to drop a further 25 percent from here.

The June price-to-rent ratio, on the other hand, was still above the peaks achieved at the heights of the prior two bubbles. It nonetheless tells a similar tale to the price-to-income ratio: the June price-to-rent ratio was 37 percent down from the peak, falling to a level last seen in March of 2002.

It would have to drop a further 24 percent from here in order to equal the 1997 post-boom low point.

Now for some clarifications. First, as is always the case with these graphs, we are making some very broad generalizations by aggregating all home prices, incomes, and rents in the county at any given time into just three numbers. These calculations serve only to provide a very big picture view of approximate relative valuations over time.

Second, while the rent figures are fairly up to date, the income data ends in 2007 and income has been extrapolated into 2008 based on 2007 growth rates. It’s probably pretty safe to say that per capita income is growing more slowly in 2008 than it did in 2007, so the more recent income figures above are likely slightly overstated. However, that doesn’t really matter all that much because home prices swing a lot more wildly than incomes. The vast majority of changes to the price-to-income ratio over shorter intervals are caused by changes not in incomes but in home prices, for which the data is pretty well up to date.

Finally, I’ve included 30-year fixed mortgage rates on the chart to show that despite substantially different interest rates over time, the price-to-income and price-to-rent ratios have tended to remain fairly contained. The exception would the sky-high valuations of the the recent bubble, which I maintain owe more to incredibly loose mortgage lending standards than to low rates.

Next week we will put mortgage rates at center stage and take a look at how rents and incomes have compared to monthly mortgage payments over time.


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