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I got a lot of pushback when I wrote last month that San Diego home prices were, on the whole, back in line with their historical relationships with local incomes and rents. One of the more frequent counterpoints was the claim that while home prices might be in line with rents, rents themselves had become unsustainably high.
How to analyze such a question? My first thought was to compare how much rents had changed in comparison to local incomes. An increase in rents that was way out of line with what San Diegans were earning would suggest the rent prices had indeed become distorted by the housing bubble.
The graph shows that while local rent prices comprised a higher percent of income in 2008 than in 2007, the 2008 level was not out of line with recent history. It was also below the historical average that has prevailed since the 1970s, although it was higher than during the late 1990s. (It should be noted that the 2008 income figure was estimated based on the change to California-wide per capita income, which was the closest thing I could find for that year. It is unlikely that San Diego’s per capita income increase for 2008 would have been sufficiently different from the statewide increase of 2.1 percent to materially change the results seen in the graph).
So, 2008 rents were pretty well in line with incomes.
But this is not to say that rents couldn’t decline from here. If San Diego housing had become oversupplied in comparison to population in recent years, this excess of available housing would tend to push rents down in comparison to incomes. Additionally, incomes themselves could decline — not a very far-fetched possibility considering the economic calamity underway, to say nothing of the fact that San Diego enjoyed a substantial (and unsustainable) income boost as a result of bubble-era excesses.
I will try to shed some light on these possibilities in future posts. For now, the first swipe at this analysis suggests that as of 2008, San Diego rents were reasonable based on their historical relationship with local incomes.
— RICH TOSCANO