Of the top 25 metro areas in America, San Diego is the least affordable, according to this report from Zach Fox at SNL (and formerly of the North County Times):
Housing prices have enjoyed substantial, double-digit growth over the past year, leading to affordability issues in some major metro markets that could cap prospects for future growth.
From a renter’s perspective, San Diego might be even less affordable than San Francisco, which famously boasts the nation’s most expensive real estate.
Prices in San Diego shot up 19.4% year over year in January, according to the latest data available from the S&P/Case-Shiller home price indexes. With prices so high, real estate agents said first-time homebuyers need to adjust their expectations.
Young renters can only make the leap to homeownership in San Diego with help from a government down-payment assistance program or their families, said Leslie Kilpatrick, president of the Greater San Diego Association of Realtors.
“I think we’re seeing more and more of that,” Kilpatrick told SNL. “This generation of parents is realizing the difficulties their children are facing in buying a home.”
A recent study by HSH, a provider of mortgage interest rate data, details how much income a household needs to afford the typical home in a given market. HSH calculated the minimum income needed to purchase a median-priced home in a given market. The study assumed a 28% front-end debt-to-income ratio and a 20% down payment and only covered principal and interest.
The results of this study raise an interesting question: How many renters in each market could afford to buy the typical home?
While it may not be possible to come up with a definitive answer, SNL explored the question using the HSH study, recently released U.S. Census Bureau data detailing renter incomes and corresponding Census data on housing units.
By one measure, San Diego had the lowest ratio of income-eligible renters — meaning they earned enough to buy a median-priced home — to housing units among 25 major metropolitan areas.
In San Diego, real estate agents think the market might be stabilizing, but prices are so high that first-time buyers are struggling to find entry. But that does not necessarily mean the market is in a bubble again.
Rich Toscano, a financial adviser with Pacific Capital Associates in San Diego, launched a blog in 2004 presciently predicting a housing crash based on overvaluation. He maintains a graph that compares home prices to a blended value of rent and per capita income. The index is now at the peaks seen in 1979 and 1990, but it is still well-below the most recent bubble.
“People say to me, ‘Are you worried about it?’ And I think, ‘It’s expensive, but it’s always been that way,’” Toscano told SNL. At the same time, he does not think there is much more room for prices to sustainably rise.
“I wouldn’t say there couldn’t be more upside, but what I would say is that whatever upside there is, I would expect to be given back eventually, at least in relative terms,” he said.
Real estate agents in the San Diego metro area seem to agree with Toscano that prices are starting to stabilize and that the days of double-digit annual growth have likely passed. Still, for buyers interested in the lower end of the market where homes are more affordable, bidding wars remain fairly common.
“Most people miss a few before they understand that when they see something they like, they have to act boldly and put in a strong offer,” said Kilpatrick, president of the local association.
Jim Klinge, a real estate broker in the metro area, similarly told SNL via email that the most recent low-end buyers he represented lost several bidding wars before nabbing a home. On Klinge’s blog, which gained national fame during the housing crisis for its candor and brash style, the agent reports hyper-local statistics on supply and demand. For now, the fundamentals suggest San Diego’s housing market is strong.
“What really matters is wondering if/when we will run out of rich people,” Klinge wrote.