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Is the San Diego housing market in bubble territory again? It’s a question I’ve heard often in recent months — and given stories about bidding wars and rapidly rising prices, it seems a reasonable thing to wonder.
The word “bubble” may mean different things to different people, but in my mind, the ultimate test for bubble-hood lies in valuations: how expensive something is compared to its underlying economic fundamentals. Any attempts to answer the bubble-or-not question should start there – so let’s do that for San Diego housing.
I believe the best way to measure housing valuations is to compare home prices to local incomes and rents. These are the most important fundamental underpinnings for home prices: incomes tell us how much money people have available to pay for housing, and rents tell us how much San Diegans are willing to pay for the “competing” method of putting a roof over one’s head.
Over the long haul, we’d expect these price-to-income and price-to-rent ratios to fluctuate around fairly constant middle-of-the-road values, and this is exactly what we’ve seen. The ratios have been very useful in mapping out the boom and bust, helping us determine when housing was dangerously overvalued and when it was actually kind of cheap.
Right now, they are telling us that – bidding wars notwithstanding — there is no bubble to be seen in San Diego housing. Valuations are very close to their historical middle-of-the-road values.
In fact, the price-to-income ratio is precisely at the middle of the road, sitting less than 1 percent above its historical median value:
The price-to-rent ratio is slightly higher, but still very much within reason at 6 percent above its historical median.
It is a little troubling that the price-to-rent ratio is actually not far below the first two peaks on the graph, but clearly, current valuations are absolutely nothing like what was seen during the spectacular bubble of the mid-2000s. To put this in perspective, at the height of the bubble, the price-to-rent ratio reached 83% over the median (the price-to-income ratio was 71% over).
Of course, we are lumping together an entire county here, so there are surely a lot of local variations these overall graphs don’t capture. But these ratios are telling us that San Diego homes are priced quite close to what has historically been a pretty normal level of valuation.
I offer no opinion as to the direction of San Diego home prices in the years ahead. But those seeking out a bubble would be advised to look elsewhere: these valuations just don’t make the grade.