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Thursday, Sept. 20, 2007 | Economists love to talk about history because there is plenty of data to analyze and explain what happened. However, while some may be interested in the past, I find audiences are much more interested in finding out what is going to happen, and more specifically, impacting each of our pocketbooks, what will happen to the housing market.

“Prediction is very difficult, especially about the future.”

Niels Bohr, Danish physicist.

Economists do not really have a crystal ball, which is why you usually do not find many wealthy economists. All we can do is decipher patterns from recent history that seem to indicate where we are going, sort of like driving down the road only being able to see out the rear view mirror — it works so long as no unexpected changes come up.

“The trouble with our times is that the future is not what it used to be.”

Paul Valery, French critic & poet

San Diego’s current housing boom and bust cycle has some very unusual aspects this time around. It occurs to me that there really is never an exact pattern for any of these boom and bust cycles, each era has unique properties.

Usually, the housing market is determined by the state of the economy. Economic growth creates more jobs, stimulating population growth, increasing demand for housing, and causing prices to rise. With higher prices, developers rush to build more homes to meet the demand. Prices eventually reach a higher level causing the market to slow, prices level off, and slip back downward, although never as much as the previous increase.

The latest run-up in housing prices was not largely driven by significant increases in jobs or population growth. Since 2000, San Diego’s job growth has been fairly modest, and while the overall population grew, there has been a significant out-migration of San Diego residents the past several years.

The current housing market was clearly exacerbated by easy credit and loans given to many who would not have otherwise qualified. My purpose here is not to rehash all the factors impacting San Diego’s current housing market. Rich Toscano of voiceofsandiego.org does a stellar job covering these issues and economic factors in his “Nerd’s Eye View.”

Currently, San Diego’s economy is performing reasonably well and other than the real estate sector, the outlook for economic growth in the region is positive. The primary sectors driving the economy n technology-driven services, R&D, and production, military/defense expenditures, visitor industry n are all performing well and adding jobs. The biggest blight on the economy seems to be in the housing market, which instead of following economic activity, this time around is dragging it down.

A year ago at this time, while preparing the forecast for San Diego’s economy the housing market was clearly slowing down, it just seemed to be adjusting to the imbalances the run up in prices had created. It was enough to slow some economic activity, but not something to cause the overall economy to significantly falter. Now three quarters of the way through 2007, with the fall out from the stumbling housing market and foreclosures spreading, the impact seems much more pervasive.

This is having a significant impact on local patterns of population growth that do not portend well for the future. The following chart illustrates changes in San Diego’s population growth over the past 17 years.

Since 1990, San Diego’s population increased by nearly 23 percent, adding almost 570,000 residents. In theory, every age category should have moved forward three categories and up 23 percent. (0 to 5 year olds in 1990 are now roughly in the 15 to 19 year old category.) Every category of age group did increase, except 20 to 34 year olds, which decreased by 8.4 percent, and 65 to 69 year olds, by 4.4 percent.

The exceptions causing the loss of residents are primarily due to the cost of housing.

Young adults by necessity are moving out of San Diego to start a family and establish their own households. They are increasingly forced to look outside the region, not for a lack of jobs, but because they cannot afford to live here. Some may find somewhat more affordable housing in southern Riverside County, but most are moving to less expensive places in Arizona, Texas, or almost anywhere else in the U.S.

The 65 to 69 year old loss is also likely related to the housing market. The age at which many retire, these residents are selling and moving probably to be nearer their kids who already moved away from San Diego because they could not afford to live here.

This has significant impacts on the local economy as a new supply of entry level workers are not coming into the labor market. San Diego has a fairly robust higher education system, but unfortunately graduating students are often unable to afford to stay here.

At a recent gathering of local communications and information technology business leaders, one of the biggest challenges stated that they face is recruiting entry and mid-level engineers to work in San Diego. The primary reason for the difficulty is not that they do not want to live and work for the company, but seeing the high cost of housing, realize they will be much better off in Denver or Dallas, despite San Diego’s great weather.

This trend suggests even San Diego high-tech businesses may need to relocate to lower cost communities where their workers can live. This leaves an aging workforce and population in San Diego, who will eventually retire and leave the workforce. They may also be the only ones left who can afford to live here.

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