Figure 1a. San Diego County Average Priced Home
The timeline view in Figure 1a shows that average home price based on sales that closed in the given month. Figure 1b shows the same data in a year-over-year format. The price run-up really jumps out.
Figure 1b. San Diego County Average Priced Home – Year over Year
While that gives us status, where do today’s prices fit in with reasonable expectations of an increase in home prices over time? In the following figures, the average home price in January of each year is extrapolated at given growth rate. Figure 2a uses 8%. Figure 2b uses 5%.
Figure 2a. Housing Price Extrapolation at 8%
Depending on whom you listen to, home prices increase by 4-7% per year. In Figure 2a, we see that an 8% growth rate (compounded monthly), lines up fairly well for 2000, 2001, 2002, and 2008. If an 8% rate is appropriate for a major city, with perhaps the best weather in the country, that is limited by the ocean to the west, Camp Pendleton to the north, Mexico to the south, and the desert to the east, then today’s prices are about right where they should be.
Figure 2b. Housing Price Extrapolation at 5%
If however, you want to use a 5% growth rate, then today’s prices line up with the beginning of 2003, clearly in bubble territory. Coincidentally, 2007 prices line up with 2004 prices. In both figures 1b and 2b, we can see the jump in prices that occurred in 2002. If this view were correct, then the average San Diego home price is still too high by about $90K.
Admittedly none of this discussion considers the economics of supply and demand as imposed by lower interest rates and a credit crunch, by growth in bio-tech and tourism or a decline in construction and all related industries. Nor do we consider the many other variables that affect our markets.
Where will or should our prices be tomorrow? An 8% growth rate does not offend me, for which I would argue that prices should be up. However, the real estate cycle will naturally drive prices below where they should be until the masses recognize the great deals and take us back to the era of multiple-offers and rapidly escalating prices (thus repeating the cycle). Given that, I expect prices to slide a bit further, but there are already some great buys out there. We are seeing some prices less than 45-50% of their highs.