<<July 2, 2002
SAN FRANCISCO – Housing prices in San Diego have increased to a level that cannot be sustained, according to a new economic yardstick designed to help builders, lenders and investors determine which housing markets are overheated and in danger of collapsing.
Among 44 urban areas studied, the San Diego metropolitan area's home prices were found to be the second-highest in relation to the income of residents, according to an index introduced last week at the Pacific Coast Builders Conference.
That could signal dangerous territory, said Irvine real estate consultant John Burns, who developed the Housing Cycle Barometer index, which will be issued quarterly.
He said it indicates that a price correction may be in the offing because local incomes are not keeping up with escalating home prices.
"The reason you got to this situation is because of a lack of supply," Burns said. "Prices have risen a lot and you can't appreciate at 10 percent a year forever."
Overall, on a scale of 0 to 10, San Diego has a barometer reading of 7.8. Only Boston's is higher, at 9.3.
Fort Lauderdale, Fla., is third at 7.6, and San Francisco is a close fourth at 7.3.
Burns said that under his system, anything over 7.5 should be considered "a large housing bubble."
But he emphasized there are "no indications" of the San Diego bubble popping "any time soon."
Indeed, the consultant expects the run-up in home prices to continue.
He told builders at the conference not to be afraid to raise their prices. At the same time, though, he suggested that the price hikes cannot go on forever, and eventually the bubble will burst.
"It won't happen tomorrow; I hope it won't happen for a while," Burns said, noting that demographics, government emphasis on home ownership, constraints of new production and strong employment growth all will serve to stave off a price correction in the near term.
That was a sentiment shared by Gary Reime, immediate past president of the San Diego Association of Mortgage Brokers. Reime is also a vice president of the California Association of Mortgage Brokers and owner of Five Star Mortgage.
"I don't know if I'd call it a bubble," said Reime, adding that any correction here would take place at least 18 to 24 months in the future. "There are new companies coming in, paying higher incomes, and new programs helping households get into a home."
Applications for new mortgages are still coming in at a frenetic rate, he said.
Still, Reime said, he has seen an increasing number of mortgage applicants come into his office planning to spend more than 40 percent of their incomes on housing costs – a phenomenon he describes as "a red flag."
In explaining his barometer, Burns warned that when the bubble pops, places with the greatest home price appreciation will take the longest to recover.
San Diego County certainly qualifies as one of those places.
For May, the last month for which figures are available, the overall median price for new and resale homes in the county soared to $315,000 – an increase of $51,000, or 19.3 percent, from the previous year, and $18,000, or 6 percent, from April, according to DataQuick Information Systems.
If prices stagnate or decline until incomes catch up, the downturn will be rather short-lived, Burns said. But if prices continue to appreciate to levels that force employers and residents to leave in search of less-expensive housing, the number of sellers will start to outnumber buyers and the bottom will fall out of the market.
Taken from a national view, the Irvine consultant's analysis is in line with most housing economists, who say that while there may be a few housing markets that are overheated, there is no price bubble across the nation.
Of the 44 markets surveyed by Burns, 24 are not overpriced, among them Riverside with a barometer reading of 4.1, Las Vegas with 3.8 and Salt Lake City with 3.5.
Only three – Boston, San Diego and Ft. Lauderdale – were extremely overpriced.
Burns found 14 other metro areas that are experiencing "small" housing bubbles. This group was led by San Francisco and included many California and Western markets, including San Jose, Orange County, Oakland, Sacramento and Los Angeles.
But it also included such relatively inexpensive places as Miami, Tampa and Charleston, S.C.
Burns said his benchmark tool is "not a measure of expensive housing markets, but rather a measure of which markets are expensive in comparison to their own history."
The barometer calculates two key ratios – one between home prices and income levels, and the other between annual mortgage payments and income levels. Then, the current ratio is compared with the mean ratio for the last 21 years in each area.
Burns said San Diego's current price-to-income ratio is not supported by the region's slow income growth, part of which can be attributed to the fact that the area is home to many retirees on fixed incomes.
In fact, the price-to-income ratio is so out of line that had the index been based solely on this calculation, San Diego would have rated a 10.
Burns also found that the average home buyer today must devote a whopping 43.1 percent of his or her household income to mortgage payments. By way of comparison, the 21-year mean payment-to-income ratio for San Diego was a much more affordable 23.8 percent.
The typical San Diego home buyer who bought a house in recent months is paying $21,108 a year to put a roof over his or her head, he said.
Still, the area's 7.8 rating on the housing price Richter scale could have been worse – and has been. If the barometer had existed in the early 1980s, it would have rated a 10.
Drawing 22,000 builders and allied professionals, the Pacific Coast Builders Conference is the nation's largest regional housing trade show.
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