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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

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