The Morning Report
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The San Diego residential real estate market is showing some strain, but it is far from a disaster in the making. The media has been in a frenzy over the state of the market for some time, measuring every piece of housing sales, valuation, employment and demographic data known to man. As a real estate analyst, I am sympathetic with this approach, but I would offer some words of caution as the reader tries to figure things out for themselves:
- Be careful about the numbers we have available. One danger is to measure valuation decline by examining data over the past year. The fact is, there are two kinds of sellers: “have-to’s” and ‘want-to’s.” Most of the “want-to’s” have been on transaction vacation since September 2006, and will not list their homes until they perceive the market has turned.
The “have-to’s” are those mostly in distress. If analysts, consumers and appraisers simply look at the statistics in front of them right now, they would conclude a mildly distressed market. That might prove to be erroneous in light of bad numbers.
- Notices of trust deed sales and actual foreclosures are up. But don’t confuse a high statistical increase with a meaningful trend. Most people are not foreclosing.
- Sub prime loans are a problem, heavily impacting first time buyers over the past several years, as well as lower household income buyers. The problem could get worse as many variable notes will adjust over the next nine months. But, here again, it would be wrong to assume the worse: many lenders are going to fix the problem before it gets out of hand by offering debt-instruments to many of the most impacted households.
- Basic supply and demand is as much at play in the real estate game as it is in virtually any other economic event. Demand for housing is down because job growth, the principal fuel of household growth is off (although we are still adding some jobs). There is a lot of job dispersion going on in the region, causing the lower paying manufacturing sectors to move to inland California and away from the more expensive coast. These transitions impact the housing market by lowering demand, at least for the present.
But don’t overlook the strength of our economic engine: San Diego is exceptionally well diversified by various economic sectors that are very diverse including military, tourism, services, technology, biology, etc. These economic clusters don’t always play to the same tune and it is inevitable that resurgence will occur in various clusters.
- Builders have not oversupplied the market (except probably in downtown San Diego), as they have in previous down cycles. Those bad earnings numbers reported by the national builders, who supply much of San Diego’s housing, are the result of stop orders they issued almost 18 months ago. Builders are not building much right now, and they won’t until deals become feasible again. Their economic hardship has been mostly good for the San Diego regional housing market.
San Diego is in a land supply-constrained market, as well. There is virtually no land in most of the urban region to build on, a factor which has and will play a role in stabilizing prices, and eventually causing their increase.
- However, there is a very wide gap between median income and median housing prices. This gap is larger than ever before, although it was the same situation of the widening gaps which contributed to the last two housing slowdowns.
The more likely scenario is not a housing crash. It is a housing doldrum. The market may continue to see modest and continuous pricing declines. And this may last another one to three years. The truth is, no one really knows. This is because real estate is a game of psychology, coupled with a dose of regional and national economic events. For instance, if there is a national recession, all bets are off.
If bad things were going to happen to the market, I expect they would have already occurred. What we are experiencing is the result of a market that is exhausted from the frenzy. But it feels to me more like the flu, not an incurable disease. It needs some recovery time.