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Thoughts on the San Diego Housing Market

by Pacific Capital Associates

 

The median price of a San Diego home recently surpassed its all-time peak, as noted by the San Diego Union-Tribune .We thought this made for a good opportunity to share some thoughts on the local housing market, addressing common questions such as…

How expensive is San Diego housing?
How do low interest rates impact home prices?
Are we in another housing bubble?
Does it make sense to buy a home right now?
We’ll give some quick thoughts on each of these below.

 

How Expensive is San Diego Housing?
Short answer: it is unusually expensive, but not nearly as bad as during the bubble.

The best way to determine home expensiveness is to compare home prices with local rents and incomes, which between them encompass most of the factors that should be expected to drive home prices long term. Measuring home prices against their economic fundamentals tells us the valuation of homes, which is a lot more meaningful than home prices on their own.

Here’s a history of San Diego home valuation, measured by dividing the San Diego home prices by a combination of incomes and rents:

Several things jump out about this graph:

  • San Diego housing valuations have had some wild swings over the years.
  • But, whenever they’ve gotten out of whack in the past, they’ve eventually come back to normal (as loosely measured here by the median historical valuation).
  • The housing bubble was nuts – at the peak, valuations reached 73% above their historical median.
  • The new nominal high in home prices has caused some worry about a bubble, but current home valuations are substantially lower than they were at the bubble peak.
  • That said, valuations are the highest they’ve ever been outside the bubble period!

Will valuations eventually return to “normal” as they have in the past? That’s usually a good bet, but in a small and supply-constrained market like the local housing market we have to acknowledge the possibility that values could stay higher indefinitely (especially given low interest rates; see next section). And declining valuations don’t necessarily assure declining prices: valuations could return to normal if prices just flattened out for several years while incomes caught up.

Still, homes aren’t just expensive – they are unusually expensive, even for San Diego. And up until now, high valuations have always made their way back to normal eventually. There’s a pretty good chance that this pattern will repeat yet again, and if it does, that could lead to years of home price stagnation or outright declines. It’s definitely a risk worth considering.

 

 

How Do Low Interest Rates Impact Home Prices?
You may be thinking that low mortgage rates are keeping monthly payments reasonable, even despite high purchase prices. If so, you are right. This can be seen in the chart below, which measures the ratio of San Diego home monthly payments to rents and incomes:

It’s very intuitive to believe that low rates should lead to higher prices – and given the confluence of high prices and low rates, it appears that this could be happening now. But, it’s worth noting that this is not how it’s typically worked in the past. There’s actually been very little relationship between rates and home valuations over the past 30 years, as shown in this graph:

There are several reasons this might be, including the influence of other economic factors (many of which push home prices in the opposite direction as rates), the impact of inflation expectations, and the fact that rates can be expected to change a lot over time.

Low rates are definitely helping to ease the burden of high home prices for now, and it’s possible that if rates stay this low, they will help homes stay expensive. But rates may not stay this low. And even if they do, as the second graph shows, it’s not a sure thing that they will keep home prices as high as they are now.

 

 

Are We in Another Housing Bubble?
Short answer: no, we don’t think so.

A bubble is more than just a market that’s gotten expensive: it’s one that’s reached extremes in both pricing and investor sentiment. While San Diego home valuations are quite high, they aren’t high enough to reach the (arbitrary, but historically pretty effective) “2 standard deviation” threshold that we use to define bubble-level valuations:

San Diego is also missing the blistering pace of price increases that usually happen during bubbles:

Investor sentiment is unfortunately harder to graph, but anecdotally, it’s clearly quite different than in the mid-2000s. There is optimism, but very little of the euphoria and blatant risk-taking that was on display during the bubble.

In short, while it’s expensive, San Diego doesn’t seem to exhibit either the valuation or psychological characteristics of a true bubble. This is important because bubbles almost always end very badly, whereas “merely expensive” markets have a much better shot at a soft landing.

 

 

Does It Make Sense to Buy a Home?
Given that home valuations are quite high, but monthly payments are low, this is a nuanced question. The answer comes down to which of those factors you care more about.

If you are buying a house that you intend to hang onto indefinitely (or at least for a good long time), and you are financing most of the purchase with a mortgage, you should probably be more concerned about monthly payments than future home price changes. Given reasonable monthly payments right now, for someone in this situation it may make good sense to buy.

Home prices may decline at some point, but they may not. Either way, you will have locked in a reasonable monthly payment for the long haul, and this is likely more important than changes in the market price of a house you have no intent to sell any time soon.

On the other hand, if you have a shorter time horizon – for example, if you are in the area only temporarily, or you hope to buy a place and move up in several years – buying looks a whole lot less compelling. Valuations at these high levels suggest unusually low potential gains, and an unusually high chance of price declines. Selling at a loss could more than offset the benefits of low monthly payments in these situations. Potential shorter-term buyers should proceed with caution.

The silver lining to this squishy answer is that in most cases, it’s reasonable to take either course. San Diego housing seems unlikely either to run away without you, or to crash horribly. So the decision can be more based on your own personal situation, preferences, and whether you find a house you really like. That’s actually a good thing.

Posted on March 7, 2018 at 8:05 am
Kara Brem | Category: Uncategorized

The Mortgage Process: What You Need to Know

 

The Mortgage Process: What You Need to Know [INFOGRAPHIC] | MyKCM

Some Highlights:

  • Many buyers are purchasing a home with a down payment as little as 3%.
  • You may already qualify for a loan, even if you don’t have perfect credit.
  • Take advantage of the knowledge of your local professionals who are there to help you determine how much you can afford.
Kara Brem
North County San Diego Realtor®
CalBRE# 01939667
Windermere Homes & Estates
m: 831-818-3050
w: www.karabrem.come: kara@bremproperties.com
See what my past clients have to say at https://www.zillow.com/profile/karabrem/#reviews
Posted on February 27, 2018 at 9:49 am
Kara Brem | Category: Uncategorized

Should I Wait Until Next Year to Buy? Or Buy Now? 

Should I Wait Until Next Year to Buy? Or Buy Now?

Should I Wait until next Year to Buy? Or Buy Now? [INFOGRAPHIC] | MyKCM

Some Highlights:

  • The Cost of Waiting to Buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.
  • Freddie Mac predicts interest rates to rise to 5.1% by 2019.
  • CoreLogic predicts home prices to appreciate by 4.3% over the next 12 months.
  • If you are ready and willing to buy your dream home, find out if you are able to!
Posted on February 20, 2018 at 12:35 pm
Kara Brem | Category: Uncategorized

Where Are Mortgage Interest Rates Headed in 2018?

Where Are Mortgage Interest Rates Headed in 2018? | MyKCM

The interest rate you pay on your home mortgage has a direct impact on your monthly payment. The higher the rate the greater the payment will be. That is why it is important to know where rates are headed when deciding to start your home search.

Below is a chart created using Freddie Mac’s U.S. Economic & Housing Marketing Outlook. As you can see, interest rates are projected to increase steadily over the course of the next 12 months.

Where Are Interest Rates Headed? | MyKCM

How Will This Impact Your Mortgage Payment?

Depending on the amount of the loan that you secure, a half of a percent (.5%) increase in interest rate can increase your monthly mortgage payment significantly.

According to CoreLogic’s latest Home Price Index, national home prices have appreciated 7.0% from this time last year and are predicted to be 4.2% higher next year.

If both the predictions of home price and interest rate increases become reality, families would wind up paying considerably more for their next home.

Bottom Line 

Even a small increase in interest rate can impact your family’s wealth. Let’s get together to evaluate your ability to purchase your dream home.

The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Keeping Current Matters, Inc. does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.
Posted on February 13, 2018 at 8:42 am
Kara Brem | Category: Uncategorized

2 Major Myths Holding Back Home Buyers

2 Major Myths Holding Back Home Buyers | MyKCM

Urban Institute recently released a report entitled, “Barriers to Accessing Homeownership,” which revealed that eighty percent of consumers either are unaware of how much lenders require for a down payment or believe all lenders require a down payment above 5 percent.”

Myth #1: “I Need a 20% Down Payment”

Buyers often overestimate the down payment funds needed to qualify for a home loan. According to the same report:

Consumers are often unaware of the option to take out low-down-payment mortgages. Only 19% of consumers believe lenders would make loans with a down payment of 5% or less… While 15% believe lenders require a 20% down payment, and 30% believe lenders expect a 20% down payment.”

These numbers do not differ much between non-owners and homeowners; 39% of non-owners believe they need more than 20% for a down payment and 30% of homeowners believe they need more than 20% for a down payment.

While many believe that they need at least 20% down to buy their dream home, they do not realize that programs are available that allow them to put down as little as 3%. Many renters may actually be able to enter the housing market sooner than they ever imagined with programs that have emerged allowing less cash out of pocket.

Myth #2: “I Need a 780 FICO® Score or Higher to Buy”

Similar to the down payment, many either don’t know or are misinformed about what FICO® score is necessary to qualify.

Many Americans believe a ‘good’ credit score is 780 or higher.

To help debunk this myth, let’s take a look at Ellie Mae’s latest Origination Insight Report, which focuses on recently closed (approved) loans.

2 Major Myths Holding Back Home Buyers | MyKCM

As you can see in the chart above, 53.5% of approved mortgages had a credit score of 600-749.

Bottom Line

Whether buying your first home or moving up to your dream home, knowing your options will make the mortgage process easier. Your dream home may already be within your reach.

Posted on February 6, 2018 at 8:35 am
Kara Brem | Category: Uncategorized

U.S. Housing Inventory Crunch Continues

U.S. Housing Inventory Crunch Continues… List Your House Today! | MyKCM

Every winter, families across the country decide if this will be the year that they sell their current houses and move into their dream homes.

Mortgage rates hovered around 4% for all of 2017 which forced many buyers off the fence and into the market, resulting in incredibly strong demand RIGHT NOW!

At the same time, however, inventory levels of homes for sale have dropped dramatically as compared to this time last year.

Trulia reported that “in Q4 2017, U.S. home inventory decreased by 10.5%. That is the biggest drop we’ve seen since Q2 2013.”

Here is a chart showing the decrease in inventory levels by category:

U.S. Housing Inventory Crunch Continues… List Your House Today! | MyKCM

The largest drop in inventory was in the starter home category which saw a 19% dip in listings.

Bottom Line

Demand for your home is very strong right now while your competition (other homes for sale) is at a historically low level. If you are thinking of selling in 2018, now may be the perfect time.

Posted on January 29, 2018 at 11:27 am
Kara Brem | Category: Uncategorized

Why You Need a Professional on Your Team When Buying a Home

Why You Need a Professional on Your Team When Buying a Home | MyKCM

Many people wonder whether they should hire a real estate professional to assist them in buying their dream homes or if they should first try to go through the buying process on their own. In today’s market: you need an experienced professional!

You Need an Expert Guide If You Are Traveling a Dangerous Path

The field of real estate is loaded with landmines; you need a true expert to guide you through the dangerous pitfalls that currently exist. Finding a home that is priced appropriately and is ready for you to move into can be tricky. An agent listens to your wants and needs, and can sift through the homes that do not fit within the parameters of your “dream home.”

A great agent will also have relationships with mortgage professionals and other experts that you will need in order to secure your dream home. 

You Need a Skilled Negotiator

In today’s market, hiring a talented negotiator could save you thousands, perhaps tens of thousands, of dollars. Each step of the way – from the original offer to the possible renegotiation of that offer after a home inspection, to the possible cancellation of the deal based on a troubled appraisal – you need someone who can keep the deal together until it closes.

Realize that when an agent is negotiating his or her commission with you, they are negotiating their own salary; the salary that keeps a roof over their family’s head; the salary that puts food on their family’s table. If they are quick to take less when negotiating for themselves and their families, what makes you think they will not act the same way when negotiating for you and your family?

If they were Clark Kent when negotiating with you, they will not turn into Superman when negotiating with the buyer or seller in your deal. 

Bottom Line

Famous sayings become famous because they are true. You get what you pay for. Just like a good accountant or a good attorney, a good agent will save you money…not cost you money.

The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Keeping Current Matters, Inc. does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.

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Posted on January 23, 2018 at 11:23 am
Kara Brem | Category: Uncategorized

What Impact Will the New Tax Code Have on Home Values?

Every month, CoreLogic releases its Home Price Insights Report. In that report, they forecast where they believe residential real estate prices will be in twelve months.

Below is a map, broken down by state, reflecting how home values are forecasted to change by the end of 2018 using data from the most recent report.

What Impact Will the New Tax Code Have on Home Values? | MyKCM

As we can see, CoreLogic projects an increase in home values in 49 of 50 states, and Washington, DC (there was insufficient data for HI). Nationwide, they see home prices increasing by 4.2%.

How might the new tax code impact these numbers?

Recently, the National Association of Realtors (NAR) conducted their own analysis to determine the impact the new tax code may have on home values. NAR’s analysis:

“…estimated how home prices will change in the upcoming year for each state, considering the impact of the new tax law and the momentum of jobs and housing inventory.”

Here is a map based on NAR’s analysis:

What Impact Will the New Tax Code Have on Home Values? | MyKCM

Bottom Line

According to NAR, the new tax code will have an impact on home values across the country. However, the effect will be much less significant than what some originally thought.

Posted on January 18, 2018 at 8:03 am
Kara Brem | Category: Uncategorized

Wondering If You Can Buy Your First Home?

There are many people sitting on the sidelines trying to decide if they should purchase a home or sign a rental lease. Some might wonder if it makes sense to purchase a house before they are married and have a family, others might think they are too young, and still, others might think their current income would never enable them to qualify for a mortgage.

We want to share what the typical first-time homebuyer actually looks like based on the National Association of REALTORS most recent Profile of Home Buyers & Sellers. Here are some interesting revelations on the first-time buyer:

Wondering If You Can Buy Your First Home? | MyKCM

Bottom Line

You may not be much different than many people who have already purchased their first homes. Let’s meet to determine if your dream home is within your grasp.

The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Keeping Current Matters, Inc. does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.
Posted on January 2, 2018 at 8:08 am
Kara Brem | Category: Uncategorized

Renting or Buying…Either Way, You’re Paying Someone’s Mortgage

Renting or Buying?Either Way, You're Paying Someone's Mortgage | MyKCM

There are some people who have not purchased homes yet because they are uncomfortable taking on the obligation of a mortgage. Everyone should realize that, unless you are living with your parents rent-free, you are paying a mortgage – either yours or your landlord’s.

As Entrepreneur Magazine, a premier source for small business, explainedin their article, “12 Practical Steps to Getting Rich,”

“While renting on a temporary basis isn’t terrible, you should most certainly own the roof over your head if you’re serious about your finances. It won’t make you rich overnight, but by renting, you’re paying someone else’s mortgage. In effect, you’re making someone else rich.”

Christina Boyle, Senior Vice President and head of the Single-Family Sales & Relationship Management organization at Freddie Mac, explains another benefit of securing a mortgage vs. paying rent:

“With a 30-year fixed rate mortgage, you’ll have the certainty & stability of knowing what your mortgage payment will be for the next 30 years – unlike rents which will continue to rise over the next three decades.”

As an owner, your mortgage payment is a form of ‘forced savings’ which allows you to build equity in your home that you can tap into later in life. As a renter, you guarantee the landlord is the person with that equity.

Interest rates are still at historic lows, making it one of the best times to secure a mortgage and make a move into your dream home. Freddie Mac’s latest report shows that rates across the country were at 3.94% last week.

Bottom Line

Whether you are looking for a primary residence for the first time or are considering a vacation home on the shore, now may be the time to buy.

The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Keeping Current Matters, Inc. does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.
Posted on December 18, 2017 at 8:12 am
Kara Brem | Category: Uncategorized