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Thursday, January 26, 2006 | “The past does not repeat itself, but it rhymes.” – Mark Twain
San Diego, it is widely understood, experienced a housing boom in the late 1980s and a commensurate bust in the early 1990s. But despite the fact that the “boom” phase of the 1980s has been absolutely dwarfed in every respect by San Diego’s current housing run-up, we are often assured by those in the business that there is no “bust” forthcoming.
There is a substantial difference, we are told, between Then and Now. Then, San Diego employment was overly concentrated in the defense and aerospace industries. The housing downturn was largely caused by post-Cold War job losses in these sectors.
Now, the conventional wisdom goes, things are entirely different. San Diego’s robust and diverse economy is no longer dependent on any single industry for its continuing health. With little risk of widespread job losses, a housing downturn is unlikely.
The conventional wisdom has it partly right. It’s true that the defense and aerospace industries were once a dominant part of the local economy, and it is true that they have since been reduced to a lesser role. But San Diego’s economy is still overly dependent on a single, vulnerable industry. It’s just no longer aerospace or defense.
It is the real estate industry itself.
Consider the graph accompanying this article. Since 2000, according to the Bureau of Labor Statistics, San Diego employment outside of the real estate and construction sectors has annualized out to just 1 percent per year. This hardly seems like the robust job growth we are constantly hearing about.
Employment in the real estate and construction industries, meanwhile, grew at almost 6 percent per year. Forty percent of all new jobs in the past 3 years were in either real estate or construction. This calculation doesn’t even include the explosive mortgage industry, which unfortunately can’t be isolated in the available BLS data, but which might push the real estate-related share of recent jobs up to as much as 50 percent.
The real estate boom has aided San Diego’s economy through more than just direct employment. It turns out that for the past few years, San Diego’s per capita income has been declining against the local Consumer Price Index (the BLS’s cost-of-living measurement). You wouldn’t know it from looking around at the shopping mall parking lots jammed to capacity with new and often expensive cars. But it is a fact.
Given the decline in real incomes, how are people paying for their new BMWs and Fashion Valley spending jags?
The answer is that the money came from people’s homes. The tremendous increase in real estate prices has encouraged homeowners to pull out equity via cash-out refinances, home equity lines of credit or the outright sales of their homes. Much of that equity, once extracted, has been used to purchase consumer goods.
This dynamic is known as the “wealth effect” and has certainly played a powerful role in our city. As a matter of fact, between 2002-2004 (the latest data available), retail sales in San Diego grew twice as fast as incomes. There is little doubt in my mind that the disparity between income and spending is largely accounted for by the “housing ATM.”
Real estate-related employment and the wealth effect have been pillars under our ostensibly robust economy for years. Now, though, it appears that both factors are very much at risk.
Home sales volume declined by 9 percent between 2004 and 2005 – a trend that appears to be getting more pronounced as time goes on. Housing-related employment surged while home sales were increasing, because more home sales meant more commissions. There is no reason to expect that the reverse will not take place if home sales continue to decline, resulting in fewer commissions to go around.
There are 115,000 San Diegans employed in the real estate and construction industries, almost 26,000 of whom entered the industry since 2000, in addition to untold thousands in the mortgage business. How many jobs are at risk should home sales volume continue to decline?
Even the bullish housing analysts acknowledge that San Diego home prices are likely to flatten out for a while as the market takes a breather. But a flattening of home prices represents an economic threat as well. If people run out of home equity to extract, the wealth effect-related stimulus that San Diego has enjoyed for the past several years will disappear and the retail sector will suffer. The reduction in new refinancings and home equity lines of credit will take their toll on the lending industry as well.
The standard contention is that San Diego’s economy will keep the real estate market strong.
This argument is circular, as it is the only real estate market that has kept our economy so apparently strong. San Diego may have weaned itself from the defense industry, but it has only replaced over-reliance on one vulnerable sector with over-reliance on another. It appears that history may be rhyming yet again.
Rich Toscano is an independent real estate analyst residing in Hillcrest and working in La Jolla. He writes extensively about San Diego housing at Piggington’s Econo-Almanac.