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Thursday, March 23, 2006 | It is the rallying cry of the San Diego housing bull: “Everyone wants to live here.”
This old chestnut has gotten an awful lot of mileage these past few years. The crux of the argument is this: data be damned; San Diego’s pleasant climate and general desirability will ward off any potential decline in home prices.
I don’t deny that San Diego is a great place to live. I do, after all, live here myself. Nonetheless, there are some problems with the “everyone-wants-to-live-here” school of housing analysis.
After all, the weather was awfully nice back in 2000. Yet the median San Diego home price has doubled since that time. Has it really gotten that much more pleasant in the past six years?
For that matter, San Diego’s weather was quite nice in the early 1990s, even as home prices experienced a five-year decline. The local economy was going through a rough patch, it is rightly pointed out. But that rejoinder only underscores the fundamental issue with the idea that nice weather justifies infinitely rising home prices: desire is irrelevant if people lack the ability to purchase San Diego homes.
The theory also begs a more practical question. If everyone wants to live here, why are so many people moving away?
According to the U.S. Census Bureau, San Diego County’s population fell between July 2004 and July 2005. It was a very small decline – but a decline nonetheless.
The population decrease should have come as no surprise. For the past five years there has been a very clear trend in declining population growth. From an increase of 1.4 percent in 2001, population growth meandered down to less than .5 percent in 2004 before going mildly negative last year. (See the accompanying graph of population growth.)
The slowdown in population growth is even starker than that, however. The raw population data is somewhat misleading as it includes population changes due to births and deaths. To my knowledge, the mortgage industry has not yet come out with an in utero loan product (though in time, they probably will). It is therefore safe to assume that – for now, anyway – not a lot of infants are buying homes.
Population loss due to deaths should also be ignored, because such losses to the homebuying population are more or less negated by a similar number of San Diegans reaching homebuying age.
For the purposes of analyzing housing demand, what we really want to look at is migration. We want to ignore the births and deaths, and to look at the number of people who moved to San Diego versus the number who moved away. Viewed through this lens, the trend towards declining homebuyer population growth becomes quite a bit more evident. Excluding births and deaths, San Diego’s population grew by just .5 percent in 2001, and was shrinking by 2003. 2005 saw an out-migration of nearly 1 percent. (See accompanying graph of net migration.)
Despite the entrenched, multi-year slowdown in population growth, the Census Bureau’s most recent data seems to have stunned many housing analysts. They’ve been quick to dismiss it as an aberration, and one pundit was recently quoted as saying that the population decline wouldn’t have an effect on the housing market. (It’s interesting how an increasing population is an all-important factor in home prices, but a decreasing population is irrelevant.)
It’s no anomaly, though. The homebuying population has been declining for three years, and that trend only seems to deepen with time.
The primary reason for the out-migration couldn’t be more clear. Homes are simply too expensive in comparison to incomes. And as housing has become pricier, more and more people have left. San Diego is indeed a great place to live, but nowhere on earth is so wonderful that people will pay any price to buy a home there.
While the desire to live here may be an unlimited quantity, the means to live here is not. This exodus is a natural result of the housing bubble, and is one of the factors ensuring that housing will one day be affordable 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.