In this article we’ll look at San Diego home prices (and, further down, monthly mortgage payments) compare to local incomes and rents.

Such comparisons are crucial in helping to determine whether the market is fairly valued.  They allow us to see how much San Diego homes cost in in relation to how much money people people have to pay for housing (incomes), and how much people pay for shelter when there is no speculative element at work (rents).  They tell us, in short, where prices are compared to where the economic fundamentals say they should be.

This first graph shows the ratio of the typical San Diego single family home to the per capita (average) San Diego income. 

The series has moved around quite a bit over the decades, especially in the recent bubble and its aftermath.  But it’s always eventually reverted back to middle ground, allowing prices to reach a historically typical relationship with incomes as we’d expect.  The green line on the chart denotes the historical median price to income ratio, which by this measure we could designate as being fairly valued.

Six-plus years after reaching 71 percent above the historical median, San Diego’s home price to income ratio is now 10 percent below that median. 

Next up is a similar graph for the ratio between the typical San Diego home price and average San Diego rent.  The price to rent ratio is 4 percent below its median value:

As far as the price to income and price to rent ratios are concerned, San Diego homes are modestly undervalued.  (That is in the aggregate, of course… individual neighborhoods may vary).

In addition to measuring home purchase prices against their fundamentals, we can do the same with monthly payments on those same homes. Thanks to incredibly low mortgage rates, these payment-based ratios are at much more extreme levels.  As the following graphs show, the monthly payment to income and monthly payment to rent ratios are both the lowest they’ve ever been during the span of the available data and are, respectively, 45 percent and 40 percent below their historical medians.

As it happens, the price-based ratios are vastly more important than the payment-based ones in determining whether homes are fairly valued for the long haul.  This is because the impact of rates is, unlike those of incomes and rents, ephemeral and undependable.  But while the price ratios are more important in determining the state of the market as a whole, the payment ratios may be more important to those considering a long-term, debt-financed home purchase.  Readers may be interested in an in-depth article I wrote earlier this year on topic of when it might make sense to consider buying, or not buying, given the circumstances of reasonable home price valuations and rock-bottom rates. 

Let’s return to the price-based ratios, since they are really what tell us whether the market is fairly valued.  (Although even they don’t tell us that with any certainty… there are of course other economic and market factors to consider… but they are a good first swipe at determining fair value).  The following table shows the extremes reached in the price to income and price to rents ratios at the highs and lows of each of the three real estate cycles that took place since the 1970s:

While undervalued by these ratios, San Diego homes have not yet become as cheap as they did in the prior two real estate busts.  This is in spite of the fact that our recent bubble was absolutely huge compared to prior housing booms.  Then again, the government didn’t expend huge amounts of fiscal and monetary firepower to prop up the housing market during those past slumps. 

Considering negative market factors such as shadow inventory and a weak economy, the good probability of substantially higher interest rates at some point, and the clear tendency for these ratios not just to return to fair value but to overshoot them, I think it’s likely that valuations will decline further in the years to come.  Then again, perhaps they will not.  It’s a lot more difficult to make predictions when the price ratios aren’t all out of whack like they used to be.  Such is life in the vicinity of fair value.

Rich Toscano is a financial advisor with Pacific Capital Associates*.  He can be contacted at

Rich Toscano has been observing the housing market for Voice of San Diego, with the occasional prolonged absence, since 2006. Follow him on Twitter at...

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