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I have already received some insightful, interesting feedback on the future of residential real estate in San Diego, which I would like to address.

Over the past 50 years the market has always increased in price, even on an inflation-adjusted basis. However, it doesn’t move consistently. Rather, there have been three recessionary cycles over my career, starting in the 1970s. They all were precipitated by different factors. They all lasted for different time periods. But eventually the market recovered. And when it did, it reached new heights.

There is a lot of sentiment that the market is going to crash, much of it expressed in the responses I have read. This is fueled by media reports, such as the recent Forbes survey which ranks San Diego as the least affordable housing market in the country.

I have no doubts that this is true. The trouble is that in the 30 years I have been studying real estate trends, we have mostly always been proclaimed as the least affordable housing market. It’s about the median income to median housing price gap I spoke of in my earlier blog; it’s about the “sunshine factor” of people being offered and accepting lower salaries relative to some other markets because they want to live here; it’s about scarcity of land and housing.

But it’s mostly about equity, or more specifically, accumulated equity enjoyed by homeowners who do not move frequently, and who benefit from the rise in values over each cycle.

The problem with the various tests of housing affordability is that many, many people are able to place large down payments on their next home, thus keeping their mortgage payments within an acceptable range. And most do not flagrantly take out lines of credit on this equity and spend it on European vacations. They keep the equity for the move up.

The rub could come when “Generation Y” enters the market: those are the children of baby boomers now entering the job market. At 82 million persons, they represent the largest population cohort in America. They will start out as renters — just as their parents did in the 1970s, and they will cause a mini-boom in the apartment market — and ultimately will be buyers. Except for those with the highest paying jobs or persons assisted by family, most will not have accumulated much equity.

Two things will happen:

1. Gen Y’s will delay their home purchase, some as many as ten years beyond when their parents purchased. In other words, many will delay until they are in their 30s. This will fuel the rental market and drive up rents to an increasingly affluent market, and;

2. Their ‘starter’ home will be much smaller, and likely will be a condominium. Eventually they will move up the housing ladder, either in more accommodating condos, or single family homes. That will be taster’s choice, but this gradual ‘move up’ over several cycles of demand which will overwhelm supply over the next 20 years and beyond.

It is not particularly fruitful to debate about if prices crash, if the market flattens, or if it, in fact, inflates. The challenge in our region is to examine our ability to supply to the markets in increasingly urbanizing San Diego. Delivering smaller, well located condos is the solution to the affordability “crisis.” We need the community planning groups, the planning departments, the planning commission and the mayor and City Council to allow density and creative infill development in the neighborhoods.

GARY LONDON

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