I’ve been meaning to write on San Diego and housing, but so many other people already are:
The Professor Piggington’s Econo-Almanac deals with the San Diego market and has some really good analysis with their Bubble Primer:
Conventional wisdom goes that San Diego is experiencing a severe housing crisis with no end in sight. The recent run-up in home prices is completely appropriate due to the supply and demand imbalance caused by a lack of developable land, years of underbuilding, and a huge surge in population due to San Diego’s desirability as a place to live. Adding fuel to the fire is the fact that San Diego’s wealth has grown significantly due to its robust and diverse economy… Sounds pretty convincing! The only problem is that it’s entirely false. There is no housing crisis. There has been no population boom. Local incomes have not even kept pace with inflation. And while San Diego may be a nice place to live, it was also nice 5 years ago, when homes cost half as much as they do today.
Professor Piggington shows that San Diego real estate is utterly dependent on the health of the San Diego economyï¿½which is in turn dependent on further explosive growth in both home prices and sale volumes. It is even more dependent on the indefinite continuance of lifetime-low mortgage rates and underwriting standards. In other words, SD doesn’t even have to hit a recession to have a wrench thrown in the works.
Boom town, San Diego – Something strange happens when real estate makes everybody rich. Is this where your town is headed?
Jim Johnston remembers San Diego housing history.
NYT looks at rent ratios (similar to price to earnings ratios for stocks). “In places like the Bay Area, south Florida and much of the Northeast, though, the two parts of the housing market have become unhinged. Even in Las Vegas and in Riverside, Calif., where rents have risen, home prices have gone up so much more quickly that local rent ratios have soared above 23, from less than 12 in 2000.” How about SD’s rent ratio? San Diego 1Q 2000 13.5, 1Q 2005 28.9
Rents have not kept pace with the price of housing, and in many cases, it makes economic sense to rent rather than buy in San Diego, according to analyses by the Wall Street Journal and Voice of San Diego.
The CS Monitor weighs in: “For rent signs are increasingly showing up in tiny bedroom communities, condos, and exclusive resort areas around the country. They are one more sign of the magnitude of the real-estate boom in the US. Eager to cash in on one of the strongest housing markets in the postwar era, speculators and even average investors are buying homes and renting them out until they decide to sell them at presumably far higher prices.” There are a *lot* of for rent signs in my neck of the woods right now.
Would a real estate crash really matter to the country as a whole? Yes. To understand why, first look at how pervasive the effects of real estate are throughout the economy.
Call it cheap credit’s revenge. “We seem to have arrived at the curious juncture where the low interest rates that rescued us from the last recession might be the cause of the next — or, at any rate, might be the cause of some serious economic or financial unpleasantness. It turns out (not surprisingly) that cheap credit, when continued too long, inspires suspect and speculative borrowing. It becomes a formula for its own undoing.”
“It’s pretty clear that it’s an unsustainable underlying pattern,” Greenspan said. “People are reaching to be able to pay the prices to be able to move into a home.” “There are a few things that suggest, at a minimum, there’s a little froth in this market,” Greenspan said. While “we don’t perceive that there is a national bubble,” he said that “it’s hard not to see that there are a lot of local bubbles.” Even head-in-the-sand Greenspan sees some issues.
Practitioners get creative to help first-time buyers in a state where median-priced homes are unaffordable for most households. How about a 40 year loan? Doesn’t that sound fun?
Lastly, an online exchange called HedgeStreet.com offers hedging contracts in six of the nation’s largest cities (Chicago, Los Angeles, New York, Miami, San Francisco and San Diego) and plans ultimately to extend them to other areas. You buy “hedgelets,” the equivalent of options contracts that will either pay off if median local prices rise or decline, depending on the hedge.