Notes on the Housing Market

It was inevitable that the residential market would take a dive. I had predicted that the market was going to peak in 2003. I was early. The up cycle lasted until late 2005 because of the loose lending standards that we all now know about.

But this is not a permanent condition. I am not prescient, but in 1991 we witnessed the dawn of true economic calamity in San Diego, where not only the housing market crashed but the entire economy turned upside down. And it took four years to retool. The previous down cycle was three years (1979-82) and prior to that three years. Past is not always prologue and if the national economy drags down further, all bets are off. But aren’t we coming into an election year? So far, economic conditions are fairly sound, suggesting that this correction will come within 12-18 months if past trends hold up.

Beware of the indicators — there are problems with all of them. For instance, using averages and medians presents a whole set of problems, which have been adequately covered in various reports on voiceofsandiego.org. All indexes aggregate the entire metropolitan area. Perhaps an index should be invented to track the “segments” of the market. For example, take the median price for San Diego and all the homes above the median as one segment and all the homes below the median as another segment. Something like this might more effectively determine the state of a market. If you did that today, you would see the lower end housing market is disproportionately pulling the average down. The bad numbers in our county — including the biggest price drops as well as the foreclosures – are in South County.
The national Case Schiller index (sponsored by Bloomberg and favored in Voice as an indicator) is methodologically fuzzy in their approach to tracking the residential markets. Investment analysts like it because it is a security-type index — meaning an index that is comparable with the Dow Jones or NASDAQ in quoting trends — so it is tempting for them to use this. I like it because it tracks actual transactions of the same home. But there is a problem with it locally: they leave out condo sales, a hugely important part of the market, and they do not account for new home sales.
Yet, the real story may have nothing to do with the valuation numbers recorded by Case Schiller or anyone else. The market is experiencing a record low number of actual transactions. So, lower home values are being recorded, with way fewer transactions, by a select group of distressed property sellers. Most home homeowners are simply electing not to participate in this market. They are sitting on the sidelines waiting for the next up-cycle, which is exactly how people behaved in the early 90s.
So, regardless of the statistical indexes that are carefully reported at Voice and other media, most homeowners are taking a vacation from transacting. They will get back to it in a couple of years. And not until these sense that prices are back up.
And they will come back up. They always do, and there is nothing particularly special about this market cycle to compellingly suggest otherwise. A lot of dumb lenders gave stupid loans to anyone that could fog a mirror. After the losses and write-offs, the market should rebound quickly.
The other reporting weakness is the tendency to ‘nationalize’ the indexes. Not all markets are created equal. Real estate is local. The national oversupply of housing has nothing to do with San Diego. Locally, there are few new housing units being added right now. In fact, at the end of the year we may see the delivery of only 5,000 homes, the lowest number of housing unit deliveries in San Diego County in 40 years. It occurs to me that when demand returns, consumers will go on a frenzy, bidding up what resale and limited new home inventory exists. There will be a lag time between housing demand and its re-supply.
The time to make money in real estate is when the market is down. I sense that the market will track down further for a few months, but I do not know exactly when we will hit bottom. What I do know is that if you are so inclined, now is a good time to go bargain hunting.
Affordability is relative. Most housing that is sold is to consumers who are moving-up to a more expensive home. Loan-to-value ratios go way down as the price of a house goes up. In other words, consumer put more down payment equity into their purchase. The problem is on starter housing: people have to start their journey up the housing ladder somewhere and, inevitably, this means that smaller condominiums (with smaller price tags) will be the big sales leader in the years to come.
The big political issue has little to do with the after-the-fire civic debate on whether and how we should build on the edges. We mostly can’t build edge communities anyway. San Diego has just about run out of developable land for new suburbs, because there are already urban limit lines in place. No, the big debate for this millennium is how do we find the money to build new fire and police stations, upgrade roads and pipes, for the massive new redevelopment of existing communities. We are going to need to create new fiscal mechanisms to address this new reality.
One other fire related observation: the irony has not been lost on me that in the efforts to conserve wild life and species throughout our county, not allowing fire breaks, vegetation thinning or roads into the canyons, the big fires destroyed much of the wild life. The regional debate on how to deal with more frequent October fires ought to include a discussion on if the federal Endangered Species Act and local environmental laws have served us well.

— GARY LONDON

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