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Based on the historical relationship between home prices and rents, I argued on Tuesday, San Diego homes in aggregate are now within the bounds of normalcy. Not cheap, I hastened to add — but reasonable.

Today we will compare rents and incomes not with home sale prices, but with monthly payments. By this metric, homes are beyond reasonable — they are outright cheap. Cheaper, in fact than they’ve been since 1977, when the available data begins.

The hitch is that monthly payments aren’t nearly as good an indicator of housing “expensiveness” as are the home sale prices themselves. I’ll explain why below; first, the data.

The below charts show the ratios of monthly payments on a typical home, as measured by the Case-Shiller home price index and using the average conforming 30-year mortgage rate, in comparison to incomes and rents, respectively:

As you can see, both ratios are at all-time lows for the measurement period. The payment-to-income ratio is 3 percent below its prior low, set in 1998, and the the payment-to-rent ratio is 6 percent below its 1996 low point.

Courtesy of a recent move lower in mortgage rates, the graphs actually overstate monthly payments at this point. The graphs are only updated through December 2008, which is the most recent month for which the Case-Shiller home price index is available. So the final figure uses the average December mortgage rate of 5.29 percent. But as of this week, according to Freddie Mac, the average mortgage rate has dropped all the way to 4.85 percent.

Using the 4.85 percent rate with December’s home price data, the payment-to-income ratio would be 7 percent and the payment-to-rent ratio 10 percent lower than their respective prior lows. And you could probably add a further couple of percent to those figures based on the likely prospect that home prices have fallen more since December.

San Diego housing sure looks like a bargain as far as these payment-based ratios are concerned. But are these the right ratios to use in order to determine such a thing? The answer is no. The following graphs, which show the same data as above but have mortgage rates overlaid in orange, indicate why:

It’s very clear from looking at these graphs that for most of the past three decades, the payment ratios pretty much rose and fell right along with mortgage rates. Lower interest rates did not justify higher home prices, in other words, nor did high rates justify cheaper housing. Housing expensiveness — as measured by the price-to-income and price-to-rent ratios discussed on Tuesday — was pretty much independent from mortgage rates.

While contrary to conventional wisdom, this makes perfect sense. If you are trying to determine what level of pricing is sustainable in the long-term, you have to consider potential monthly payments over that entire long-term, not just during a given month. And mortgage rates are subject to change so much over the long term that they become a lot less important than home prices themselves in determining whether homes are overpriced or underpriced for the long run.

The relationship between monthly payments and mortgage rates did break down during the recent bubble as payments rose in spite of very low rates. But this was the exception, not the rule, and it’s pretty clear that this unusual behavior was due to the oft-documented explosion in risky mortgage lending.

The payment ratios, while not a great valuation metric, still contain useful information. These ratios feed into the rent-versus-buy decision being made by potential home buyers throughout San Diego and accordingly impact potential housing demand. But that impact is fleeting — it only lasts for as long as rates remain at this level.

Rather than using the payment ratios as an arbiter of sustainable price levels, it makes more sense to think of them as a “market factor,” similar to foreclosures, unemployment, and other dynamic elements that affect housing supply and demand but change constantly.

In this case, the rock-bottom payment ratios are a positive market factor. Very positive. Mortgage payments are the lowest compared to fundamentals that they’ve been in three decades of data. But homes themselves, while no longer expensive, are still not cheap.

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