County home prices reach 9 times the average wage
Cost gap hitting a limit, some experts contend
By David Washburn
UNION-TRIBUNE STAFF WRITER
December 27, 2003
Nancy Befort and her husband have a combined income approaching six figures, but must struggle like minimum-wage earners to make ends meet.
The reason: a monthly house payment that would choke a horse. They pay $2,400 a month for a three-bedroom house in Chula Vista.
"It's really been a stretch," said Befort, who bought the house in May. "We can't even afford to go out to dinner."
Befort's predicament is becoming more common in San Diego County, and that could be a bad sign for the local real estate market. With the median price for all types of housing now $393,000, it's likely housing in San Diego County has never been less affordable.
Home prices are now nine times the average wage in San Diego County, according to a Union-Tribune analysis of price and wage data going back three decades. It is the largest difference since 1975 ? when such records started to be kept ? and probably ever.
Only 16 percent of San Diego County households could afford the median home price in October, making it the state's least affordable region for the first time in history, according to the California Association of Realtors.
The last time the affordability index was even close to the current low level was in 1989, when affordability averaged 22 percent. A year and a half later, the housing market began a five-year downturn.
Real estate experts say the gap between San Diegans' paychecks and the cost of real estate may be hitting a limit. People will often stretch their budgets to buy a home in a booming market, but only so far.
The declining affordability, combined with a flat rental market and an almost certain rise in mortgage rates over the next year, means that another downturn is a possibility, several market watchers say.
The now eight-year run of price increases will likely extend into 2004 on momentum alone, they say, but 2005 could be painful.
"San Diego is getting pretty close to the top of its market," said Bruce Norris, a real estate consultant in Riverside. "I would be cautious about expecting anything to go up in price from here."
But others contend a newfound diversity in the local economy and a sea change in how the residential construction industry builds houses translate to high demand and continued home price increases.
That demand, however, will start drying up with even a modest increase in mortgage rates, said John Karevoll, an analyst for DataQuick Information Systems, a local firm that tracks housing prices by ZIP code.
"Right now we have rates around 6 percent," Karevoll said. "If they go to 7.5 or 7.8 (percent), you will see San Diego cool off substantially."
Rates to climb
Interest rates have been at 40-year lows for most of 2003, but with the economy picking up and a $500 billion federal budget deficit, economists say the rates have nowhere to go but up.
"What mortgage rates give, mortgage rates take away," said Chris Thornberg, an economist with UCLA's Anderson School of Management. "And rates are not going down again, that is for sure."
When rates do go up, the average mortgage payment for newly bought houses ? which is already above $2,000 and about 70 percent of the average monthly wage in San Diego County ? will become unaffordable to too many people, say Thornberg and others.
Housing price increases have traditionally outpaced wage gains, but there is a limit, economists say.
"There are periods when people pay more than they can afford to, but it can't last very long," said Ingo Winzer, director of The Local Market Monitor, a real estate research firm in Maryland. "And we are definitely in one of those periods."
Befort, who is planning on having kids, said that despite the strain on her budget she considers buying a home a smart thing to do in the long run. But she worries about her timing.
"I'm getting concerned that the market may crash."
While most experts in California and elsewhere say Befort shouldn't stress about a crash such as in the early 1990s, they agree that San Diego County homeowners won't enjoy gains over the next five years as they have during the past five, and may even see a drop in prices.
The latest numbers show that San Diego County has gone from leading Southern California in home-price appreciation to lagging.
No longer on top
The county's median home price rose 14.2 percent from October 2002 to October 2003, a lower rate of appreciation than in Los Angeles, Riverside, San Bernardino, Ventura and Orange counties, according to DataQuick Information Systems.
"Trends which are unsustainable have a tendency to come to an end," said Michael Carney, director of the Real Estate Research Council of Southern California.
Erin Doherty, a doctoral student and substitute teacher, just bought a condo in El Cajon and says the mortgage eats up 80 percent of her take-home pay. She says her new mortgage is double what her rent used to be.
Doherty said she is taking on the extra burden with hopes that her condo will appreciate enough in the next few years that she can sell it and pay off her student loans.
"It is a dramatic lifestyle change from renting," said Doherty, who has severely curtailed her spending in other areas.
Only in markets like this is the lifestyle change dramatic, economists say. The current gap between the average new mortgage and the average rent is $872, the largest in San Diego history, according to a Union-Tribune analysis of San Diego Regional Chamber of Commerce data. From 1970 to 2002, the average gap was a more modest $348.
Some economists see the ratio of rents to home prices as a significant warning sign. The demand for real estate will inevitably soften when it becomes dramatically cheaper to rent.
If prices do soften, homeowners will likely suffer more than during previous downturns. This will be mainly because relaxed lending policies have given people unprecedented access to the equity in their homes.
Household debt
"Stagnating prices (today) can hurt people like falling prices used to," said Winzer, of The Local Market Monitor.
Winzer says the amount of household debt has changed the equation. Consumer debt has gone down in every recession since 1970 except the most recent one, he said.
"People are in debt up to their eyeballs," he said. "There is no wiggle room. They have borrowed to keep spending. And you can only do that if home prices keep going up."
In order to get into their $345,000 home in Chula Vista, Befort and her husband took out an "interest only" adjustable rate mortgage that will stay at 5.8 percent for five years.
"Another percent would kill us," she said. "It just wouldn't be worth it. We'd have to sell it and just rent again."
Befort could have a bumpy ride over the next few years, said Yale economist Robert Shiller, who has been studying the Southern California housing market since the 1980s.
"We think there is a bubble going on in what we call glamorous cities like San Diego," he said.
San Diego, Shiller says, is in the same class as cities like New York, Los Angeles, San Francisco and Boston ? cities that are home to international celebrities, world-class universities or high-technology industries.
Home prices in these cities are high as well as volatile, he said.
"Imaginations can run wild in places like San Diego, especially compared to places like Milwaukee," Shiller said.
A roller coaster
Indeed, a 25-year graph of Milwaukee housing prices looks like an escalator, gradually going up. In California it looks like roller-coaster track.
That's why economists can have such a hard time predicting the fluctuations in housing prices in California.
"Real estate markets are inefficient because things don't happen when they are supposed to," Winzer said. "Prices don't come down when the fundamentals say they should. But they do eventually."
But while Winzer and Shiller say "eventually" is just around the corner, others disagree.
No one disputes that household debt levels are high, but some say the positives in this cycle will keep prices up. For one thing, the employment situation is nowhere near as bad as it was in the early 1990s, when unemployment was close to 8 percent.
Interest rates are rising but are still significantly lower than they were then. And developers haven't overbuilt the way they did in the late 1980s.
A big reason for the declines in the early 1990s, experts say, was a late 1980s speculative bubble in Southern California.
Marney Cox, the chief economist for the San Diego Association of Governments, argues that the dynamics of the San Diego region have changed in the last decade, and the demand for houses in the county will remain strong, with prices staying high.
Demand not met
Prices keep increasing in San Diego County because builders are not meeting the demand for single-family housing. But that demand is being met in southern Riverside, meaning that a higher premium can be put on San Diego homes, Cox said.
"There isn't the bubble that people think there is because there is a lot of growth just outside our boundaries," Cox said. "Housing prices would have bubbled if we didn't have the relief valve of Riverside."
Southern Riverside, he said, has become part of the San Diego job market over the last decade. More than 20,000 people live there and work in San Diego County.
"People are willing to pay more to live here, and we have a limited supply," Cox said. "San Diego is not supplying the units for the demand. The people are not going to Phoenix or Atlanta, they are going just across our borders."
He expects a decline in the rate of home value increase, but doesn't expect a prolonged period of flat prices.
Cox's view is shared by Robert Kleinhenz at the California Association of Realtors. He said population gains, low interest rates, short supply and a relatively strong economy signify a strong real estate market.
Kleinhenz is, however, worried about the market for first-time buyers.
"There is no doubt that we are looking at a situation in terms of affordability that's not good and it's going to get worse," he said. "If you can't increase opportunities for first-time home buyers it will be a serious problem, not only for the housing market but the entire economy."
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