San Diego home valuations have risen compared to local rents and incomes, as I recently discussed.  But thanks to ultra-low mortgage rates, monthly payments on those same homes are almost as low compared to rents and incomes as they’ve ever been.

The following graph displays the ratio of mortgage and tax payments on the typical San Diego home, as measured by the Case-Shiller index, to San Diego incomes.  It shows that since the data began, the payment-to-income ratio is the lowest it’s ever been aside from that brief period last year before the recent price rebound began.

The payment-to-rent ratio shows a similar pattern, except that it is even cheaper compared to the prior cyclical lows reached in the mid-1990s.

Does this mean that homes are a screaming bargain?  Only if you believe that rates will stay this low forever.

I’ve discussed this issue many times; those looking for a detailed explanation can check the August 2009 update of these charts.  The long and short of it is that interest rates change over time, so monthly payments they don’t do nearly as good a job as sale prices at telling us whether homes are priced at a level that is sustainable in the long term.  Proof of this can be seen in the above graphs, which show that until this decade’s easy credit-fest, monthly payment ratios tended to rise and fall right along with mortgage rates.

Begging your forgiveness for venturing into an area that is slightly off-topic for a local news publication — if relevant to the subject at hand — it is my opinion that interest rates will go much higher at some point in the years ahead.  A huge portion of the demand for our debt is artificial, a function of foreign central bank buying and of our own central bank’s monetization.  (“Monetization” is a central banker’s euphemism for “printing money to buy a financial asset,” and perfectly describes the Fed’s ongoing effort purchase mortgage-backed securities with over a trillion dollars created out of nothing).  Meanwhile the supply of our debt is exploding due to our massive deficit spending, adding to the mountain of debt we’d already accrued over the past couple of decades.  At some point, the artificial demand will cease and rates will have to rise to attract non-artificial buyers.

Looking further ahead, I do not believe that there is a politically viable way to pay back all the debt that we owe to foreign nations.  We owe too much to grow our way out of at this point, so paying it back would involve significantly decreasing our spending and increasing our saving — an outcome that the recent borrowing-and-printing bailout frenzy should make clear that no politician or Fed head is willing to let happen.  The choices are to default on the debt outright or — much more likely — to make our money, and thus the real burden of our debt, worth less.  Either outcome leads to higher rates.  Possibly much higher.

OK, as I warned, that was a bit out of scope from the usual local news fare.  But it matters here, because it’s important to realize that the low payment ratios charted above are the result of artificially, unsustainably, and exceedingly low interest rates.  Today’s low rates are a huge boon for buyers who can to lock in and keep those low rates indefinitely.  But for those who buy today with the intent to sell sooner rather than later, the prospect of much higher interest rates down the road is a risk factor that should be considered carefully.


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