Thursday, April 07, 2005 | With more than 7,400 new downtown San Diego condominiums scheduled to come on line for sale by 2008, concerns are rising that the rapid price increases of the last few years could be coming to an end.
In June of 2004, the average sale price for condominiums downtown was $1,005,161, according to figures from the San Diego Multiple Listing Service. As of the last week of March, the average sale amount was $854,039. The average sale price actually fell to $774,300 during the first week of November 2004, the week of the November general election. Since then the average sale price each week has floated between $790,415 and $854,039. The average price is due both to market conditions and to the type of units (size and location) that are available for sale.
The 7,400 units represent almost double the number completed between 2000 and 2003, according to San Diego real estate consultant Gary London who supplied these numbers to Voice of San Diego.
London, president of the real estate consulting firm The London Group, said the number of people who have already bought downtown condos and are now trying to sell them has also increased.
“We have (more than) triple the inventory of resale units on the market now from this time last year,” London said. He says 253 downtown condominium units are on the market now, compared to 57 at this time last year.
Investors waiting to sell
“I would say [the rate of speculators] is about 30 to 40 percent,” said real estate broker Lew Breeze who handles properties in Little Italy. He says many buyers don’t move into the units, and aren’t even bothering to rent them out.
“I’m seeing a lot of people buying second and third homes,” Breeze said. “And then [they are] leaving them vacant, paying $700 a month homeowner’s fees … It wasn’t like that two or three years ago.”
London said downtown has historically attracted real estate speculators, but he noted that many of the approximately 1,500 units coming on line this year are in the East Village, which has more affordable housing that will attract investors.
“If history is our guide, [the rate of speculators] will be about 30 percent, but it could be lower because the units are in East Village,” said London. “But there are people there who are obviously going to live there and flip.”
Flipping is the practice of buying property for the sole purpose of selling it quickly after it has appreciated over a short period of time.
Breeze says the practice is a lot more common now than it used to be. “People are looking to flip,” Breeze said. “People were coming in 2003, buying it and flipping it in 2005 and making $200,000.”
Shiller says downward price adjustment could happen
“People can’t imagine that this is a bubble, but it is,” said Yale University economics professor Robert Shiller. Shiller is the author of “Irrational Exuberance,” in which he predicted the collapse of technology stocks in 2000. Shiller says the frenzy of buying in San Diego real estate over the last four years mirrors what happened in 1929, and he says conditions are right for a major downward adjustment in overpriced real estate markets like San Diego.
“It’s happening now like in the ’20s,” Shiller said of housing prices in San Diego. “People then thought that the market can only go up, and they were trading stories about how much money people made. And you had economists saying it was fundamentally sound, that prices would never go down.”
Shiller has authored a second edition of “Irrational Exuberance,” in which he looks at the dramatic increase in housing prices throughout the country, and the perception that real estate investment is risk-proof. He says even in light of the real estate collapse of the early 1990s, when housing prices in Southern California dropped by as much as 20 percent, many buyers today still think there is no downside to real estate investment.
“It used to be that you had people who said home prices had never fallen,” said Shiller. “But the ’90s changed that. Now they say [prices] may drop, but they will come back stronger that ever.”
Disagreement with Shiller’s view
“Downtown has been a strong investment for quite a while,” said Mark Riedy, executive director of the Burnham-Moores Center for Real Estate at the University of San Diego. “All the stars are aligned to make downtown San Diego a good place to live and work. I don’t see any indication that downtown housing is going to be a money-losing proposition.”
Riedy says he believes there is enough insulation against downward pressures on the market to protect buyers who invest in real estate in downtown San Diego. He cites the growth of the restaurant and entertainment industries downtown, the ballpark redevelopment project, and the city’s commitment to promote development through the Centre City Development Corp. Riedy also believes that even if the number of buyers who are speculating on downtown real estate approaches 30 percent, the vast majority can handle the risk.
“Eighty or 90 percent of that 30 percent have staying power to last for the long haul,” Riedy said. But even though Riedy is optimistic about the investment potential of downtown condominiums, he agrees that a correction is taking place.
“I think it’s probably a healthy correction,” Riedy said. “Two months of reduced sales does not surprise me. It may cause some people to drop prices, maybe. Is it going to cause the bubble to burst? No. But I think we are past the peak.”
Patrick Heald is a freelance journalist who is also pursuing a teaching degree. He lives in San Diego.