Press Release

As published in the San Diego Daily Transcript, January 10, 2008

To get at the answers to those questions, it is worth briefly summarizing how we found ourselves where we are today. Starting in 2001, an unusual bubble of housing prices was created by very favorable credit market conditions. Price increases were not based upon rapid growth in personal income and new jobs being added to the local market from industry growth as in past housing booms. In this instance, extremely cheap money increased the purchasing power of borrowers. Mortgages with adjustable rates, interest-only mortgage payments, or initial negative amortizations pushed purchasing power even higher. From 2001 to 2005, home prices in Southern California grew at roughly eight times the rate of median personal income, among the highest ratios in the country. By contrast, in Seattle, housing prices increased four times the rate of personal income, while in Denver, the ratio was 2 to 1.

With mortgage interest rates already low, re-payment amounts to finance home purchases greatly boosted affordability and further escalated home prices. Meanwhile, rising home values allowed homeowners to cash in their equity to buy HDTVs, cars and take vacations. This boosted retail sales and generated a feeling of prosperity, particularly among the home-owning middle class.

As usually happens in a bubble, there were widespread expectations that prices would continue to rise and one should buy now before prices rose even higher. First-time home-buyers feared being priced out of the market or missing out on the phenomenal equity gains reported being made.

As Don Meredith used to sing on Monday Night Football, “All good things must come to an end.” Starting in 2006, prices started to tumble with San Diego at the leading edge of the downward curve. The region was among the first in Southern California to experience rapidly rising home prices and the first to see prices soften while prices in the rest of the state continued to rise.

Housing prices also jumped in previous booms — in the 1960s, mid-1980s and late-1990s. However, in those cases, rising prices were not generally the primary driver of economic activity generated by the housing market. Instead, economic expansion resulted from multiple sources — international trade, diversified manufacturing, defense and, in the 1960s and 1980s, aerospace. Housing prices moved upward as a result of job and income growth.

It is the continued resiliency of local job growth that suggests the bottom of the real estate market will hit this year. According to the California Employment Development Department, job gains among San Diego’s important technology industries remain strong, as well as among health and visitor-related sectors. San Diego added more than 20,000 jobs in 2007, but some 7,000 jobs were lost in construction and real estate, leaving a net gain of only 13,000.

Paradoxically, a weakening real estate market may be precisely what San Diego needs. In 2006 and 2007 several business organizations pointed to high housing costs in San Diego creating serious problems for local workers with the recruitment and retention of employees becoming even more difficult. Organizations were seriously contemplating skewering future expansion plans toward other locales with a lower cost of living and reducing upward pressure on payroll costs. The prospect of fewer buyers and lower home prices, along with still low mortgage interest rates may be the opportunity many local residents need to afford their first home.

When one looks at the fundamentals it is apparent there are additional underlying strengths in our market. Unlike many other markets, San Diego is not overbuilt. Homebuilders in San Diego learned the lesson from the bloodbath of the early 90s and few homes locally are now constructed “on spec” by builders. This is in stark contrast with other gloomy markets, including Riverside, Las Vegas and Atlanta, where individual sellers and owners of foreclosed properties are competing with builders who have unsold inventory that they need to sell. With San Diego having a home-ownership rate far below the nation’s average, it is readily apparent that there are still many who would like to buy a home, but are priced out of the market.

Tracking San Diego’s real estate cycles over the years, it is difficult to see the current downward swing in prices continuing beyond another year now that the local market is well into the cycle of correction. The good thing for San Diego is the housing market was well into the correction before the rest of the state and nation started to experience the slowdown. Consequently, San Diego should be among the first housing markets to see housing values resume rising in 2008 and early 2009.

The key canary to watch in this coalmine will be job growth. If the region continues to add jobs, even at a modest pace, the market will stabilize. If that does occur, pressures to increase prices on the existing supply of local housing will readily reappear.

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