Buried beneath all the sour news of rising foreclosures and declining prices last week was a bit of good news for the San Diego County housing market: Prices have finally fallen low enough to achieve some semblance of affordability for potential home buyers.
With the median price down to $385,000 – roughly the same as in summer 2003 – much of the frothiness of the Great San Diego Housing Bubble has melted away.
In its place is a growing glut of unsold homes – including many that have been foreclosed upon – that have almost returned to the historical average for affordability. An additional 5 percent drop and we'll be there, according to a study released last week by Chapman University in Orange.
Does that mean the housing crisis is over? No. If past experience is any indicator, home prices will probably dip below the historical average before bottoming out. Over the next few months, the housing market's hurdles will include tight credit, rising foreclosures and growing joblessness, which means fewer potential buyers.
It's hard to sell a house in those conditions.
On the other hand, a return to affordability does signal that the market is regaining its sanity. And it hints that a bottom could be approaching in the midterm future – perhaps as soon as early 2009, market watchers say.
“What's going on with San Diego home prices is a great thing, although it might not seem great to people who are trying to sell their homes,” said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto.
“Prices are getting affordable,” said Mark Goldman, a real estate lecturer at San Diego State University. “We're starting to get a reasonable inventory in the $350,000-to-$450,000 price range. There are a tremendous amount of condos for around $200,000.”
Esmael Adibi, director of the Anderson Center of Economic Research at Chapman University, said San Diego County – which led much of the nation with its housing bubble – is now leading Southern California in the return to affordability.
By his calculation, the median home price in San Diego County now needs to drop only 5 percent to hit its historic norm, compared with 8 percent for the Inland Empire, 13 percent for Orange County and 20 percent for Los Angeles.
“L.A. prices are really only beginning to fall,” Adibi said.
To calculate the local affordability rate, Adibi took the median home prices of each month since January 1989 and compared them with the median wage for each of those months. On average, Adibi found, San Diegans spent roughly 33 percent of their median wage on home payments during that period.
The last time we were at that average was late 2002. Home prices plateaued at a slightly higher level in 2003 and then started to skyrocket in early 2004.
Between late 2005 and early 2006, as the market was peaking, home buyers with a median salary using a standard 30-year fixed-rate mortgage to buy a median-priced home would have had to use more than half of their paycheck on mortgage payments.
“We even took into account the tax breaks that people get for making mortgage payments, and the cost still came out to be 52.2 percent of their income,” Adibi said.
Since November 2005, the median home price in San Diego County has plummeted from $518,000 to $385,000. That's a steep-enough drop to make homes affordable – if buyers are lucky enough to find a bank that will lend them money.
Several other studies using different methodologies conclude that San Diego home prices are becoming affordable:
A recent study by Global Insight found that in late 2005, home prices in San Diego County were 35 percent overvalued, based on historical trends. By last December, home prices were only 0.4 percent overvalued, which implies that they are likely undervalued right now.
“Overvaluation is being dissipated quickly across U.S. metropolitan areas, though tight credit market conditions will continue to hamper real estate markets throughout 2008,” said James Diffley, who heads Global Insight's regional services group.
The Center for the Continuing Study of the California Economy shows that home prices throughout California are getting closer to their historical relationship to median income, though they still may need to drop about 20 percent to get back to the norm they enjoyed between 1988 and 2002.
Data from the California Association of Realtors show that a median-priced home in San Diego County is now affordable to 31 percent of first-time home buyers, compared with the low of 21 percent in mid-2006. But there's still a way to go before we get to the 42 percent affordability rate of early 2003. One caveat about the association's numbers is that it uses adjustable-rate mortgages, which are almost unattainable these days, so the actual level of affordability may be lower than the numbers suggest.
Once prices hit affordability, though, the decline in the housing market will probably not stop immediately.
“The market always overreacts, so it's very likely that prices will go below the mean,” Adibi said. “How far down the prices go depends on such things as whether mortgage rates fluctuate, the job market gets worse or the inventory of unsold homes continues to grow.”
Adibi noted that during the housing boom and bust in the late 1980s and early 1990s, home prices declined so low that San Diego buyers could purchase homes using about 23 percent of the median salary – far below the historical average. At that time, the decline lasted six years, and once the market hit bottom, it took two years before it returned to its pre-slump peak.
He hopes that will not happen this time.
“Prices are dropping at a much-faster pace than they did then,” Adibi said. “If they continue at this pace, we can probably get to the bottom in 2009.”
Dean Calbreath: (619) 293-1891; dean.calbreath@uniontrib.com
