OT: San Diego housing bubble or not?

Triathlon Forum
1

My wife and I lived in San Diego from 1999 to 2003. We absolutely loved it there. During that time, our house appreciated nearly 100% in value. We bought a new house in the Mission Valley area where there wasn’t much competition, and did really well. When my job forced me to relocate to Arizona, we were sorry to leave and vowed to return when we get the chance.

Well, now there is an opportunity for me to pursue transferring back to San Diego. The trouble is, our old neighborhood has continued to go up in value another 25% or so, while our housing here hasn’t appreciated nearly as much. I’m really regretting I didn’t just rent our our place instead of selling, but that’s water under the bridge.

Anyway, if we did go back, it wouldn’t be in nearly as nice of location or house as we had before. And I’m concerned that with the San Diego and California government accounting problems, interest rates rising slowly, and increasing inventories, this may be the worst time to buy a house there. Renting is a possiblity I suppose, but then you loose if the prices stay flat or increase. The whole situation looks depressing enough that I’m thinking I won’t even try for the transfer. Maybe in a few years things will look better.

Seems silly though. This is a job that pays well over the 6 figure boundry, and I have enough down payment to buy a nice house outright almost anywhere else. But in San Diego I’d either have to buy something fairly small or pretty far inland and suffer the commute with everyone else. I can’t understand how there can be so many people willing and able to pay this kind of dough. I thought it was bad in 1999, but it’s 3 times worse now. All of Southern CA seems the same. Pro triathletes there must be living 10 to a room.

Any advice, or comiseration?

2

You might look for a little shack in Coronado. A little bit of paradise doesn’t come cheap. But if you plan on doing tris for a long time then there’s no better place to be in the U.S.if you can reduce the commute to a minimum. If you know love it there in S.D.then how can you go wrong? but perhaps its best just to look for a short term rental to check out exactly where to buy.

3

In the macro context economists are in agreement that we are in a housing bubble, but there is no consensus if as and when it might fizzle or even burst. If you have a long enough time horizon for your purchase and are in a solid financial situation then you will be able to ride out any market dip assuming you don’t put yourself in a “must sell” situation. Interest rates are going to continue to increase, as will consumer prices, but ARMs are still vey attractive due to the money you save in the first 5 years. The Fed appears (emphasis on appears) to be ahead of inflation (though some commodity prices have risen significantly over the past 12 months), so rates, in my estimation, will not rise rapidly but rather drift upward (watch the 5 year Treasury rate for an indication) giving you an opportunity to lock in a reasonable fixed rate if you want to at a later date. Do the math before you lock in a fixed rate to better ascertain where the cost/benefit lines intersect. Again look at the long term treasury curves to give you some idea as to where rates might trend.

If real wages (wages adjusted for inflation) do not increase as interest rates rise and if the market remains volatile or trends down then housing prices are unlikely to increase at the current pace, because there will be insufficient demand. At some point consumers will simply rent as opposed to buying. A tight job market seems to be pointing to limited wages increases over the next few years. That said if you compare the US housing market to some foreign markets, as some advocate (see Tokyo), then there appears to be more upside and certain middle markets will experience considerable appreciation. My friends bought a rather expensive place in San Fran last year and have already done quite well. To some extent you must be fearless or have a long term view.

The key right now is not to buy more house then you can afford. Or if you are risk averse rent and wait to buy on a dip. If you need an analytical spreadsheet that helps you determine whether its better to rent or buy pm me and I might be able to find a spreadie that does the math. Good luck and listen to me at your own peril.

4

Most of San Diego is over priced, If your old school and your primary reason in buying a home is a comfortable neighborhood and location near work, ,or your a profiteer looking for the max return. I would try the beach ( summer traffic is hell , you know ), as friends say their is only a ribbon of coast line, If its 1 - 3 mil. Don’t let the numbers scare you, hold it a few years and you will make more to buy Down to an inland property. The fastest growing “new reasonable priced area” was temecula to the north, south to Chula vista’s East lake Area. But if your downtown, traffic is better up from the South. In mission valley west of the stadium, has tons of new apartment / condo developments going up and on the North rim. Some friends have nice places there, more shopping in the area, running paths on the edge of the river have been lengthened. I believe once the interest rates go up, lots of spec. investors will dump property and go back to stocks-- funds. Already you see a saturation of high end homes being harder to sell, for sale signs hang more than a few weeks, which normally sold in hours or days before. I recommend renting a year or so, in mission valley. Or Mission hills , If your work on north island , try there .

5

Dan, you are correct, 20 % per year rise in price. My neighbor and freind is a real estate agent, nothing is going to change in the forseeable future.

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IMO Southern California has too much unmet demand to see prices go down any time soon. I can see a couple years of 5% or less appreciation as supply and demand equalize a bit, but nothing indicates prices will go down.

8

We are on the third ring (of 6-7 total) of saturn in terms of the housing bubble. If I lived in Norman, Oklahoma or Montgomery Alabama I might be concerned of a purchase at the peak of a declining market.

HOWEVER, San Diego is considered one to be one of the most desirable locations to live in the entire United States. This will counteract any infationary issues. And will continue to do so. As long as local jurisdicitions in desirable areas keep new housing developments to an absolute minimum (with approval processes taking more than 2 years for a new neighborhood), demand will continue to outstrip supply. This fact coupled with the desirability of San Diego means that you should buy as much as you can afford and finance it accordingly with rates being as low as they are. An ARM can be very attractive IF you are interested more in investment and less in the establishment of a homefront (long-term place to live and not as an alternative to the equities markets).

9

Dan, you are correct, 20 % per year rise in price. My neighbor and freind is a real estate agent, nothing is going to change in the forseeable future.

That is one of the funniest posts I’ve ever read. First, real estate agents know LESS than nothing. They are 100% motivated to always say – no, BELIEVE – that the market will remain fast and furious. NEVER listen to an agent.

The truth on housing in So Cal (sorry many of you above are wrong) is that there indeed is going to be a material downtick in prices. It is not a question of “if”, but rather “when and how much”. I laugh at those who can’t see the dotcom parallel. Or those who say that it’s somehow different this time. Or even those who point to lack of supply, and California’s desirability (word?) as ensuring price appreciation. Apparently these people weren’t paying attention when prices fell 40% in LA and nearly as much in San Diego in the late 80s/early 90s.

It’s important to note that the above decline was at a time when housing was CHEAPER relative to incomes. 50% CHEAPER. And yet prices still fell. Some will point to the unwind of the military contractors, etc., but that was only one of several factors. Currently, California’s prices (especially San Diego) are shoved to the limit of affordability… any increase in taxes, interest rates, etc., will reduce the ability of buyers to pay current prices. Notice how the real insanity didn’t begin until interest rates dropped?

Let’s not forget Tokyo, either. Prices are HALF of what they were in 1986. Whens something gets overheated, this can happen.

Note that this is coming from someone in Nor Cal w/ a home well above the median value where prices are generally even higher than SD. The difference up here (in addition to incomes ~50% higher than SD’s) is that we’ve been fairly flat since 2000 (prices fell slightly, then recovered to near those levels again). And the SF area has historically commanded a premium. All that said, I’m likely relocating to So Cal myself in late 2005. I’ll probably rent and wait it out. But I may not have to, as SD’s inventory is already WAY above the levels we’ve seen in the last couple years. Want to see what SD’s market will be like in another 6 months? Look at Las Vegas… was booooooooooooming, now dead. Go to Fortune.com, and do a search for a September article called “Is the housing boom over?” or something like that. Best read yet on this topic.

But again, never, EVER listen to an agent about prices. Ask one how much they think prices will go up on average over the next 5 years. Many say things like “approx 10% per year.” Do the math – incomes would have to more than double to support that (remember, incremental tax rates are higher than the average rate).

Good luck!

10

Most notable difference between now and then is the beurocratic process of entitlements that keeps new developments to a minimum and artificially limits supply.

There are certain parallels to the dotcom bubble, BUT there was no outside influences limiting the supply of dot-coms. Herein lies the difference. And it is different from the downturns that you mention in that it was MUCH easier to develop new housing and neighborhoods in the late 80’s. What took a matter of weeks/months then now takes a matter of years.

BTW<

12

The San Diego housing market is a bubble of NASDAQ proportions. I do primary research on this question as part of my trade.

I’ve read Alan Gin’s work (economist at USD who shamelessly champions our housing market, using grant money from the home building industry). It’s some of the worst economic research I have ever read. It’s as if the guy somehow slept through the part of grad school where they said, “Be careful – a lot of this simplifying math is only to illustrate a point. The real world is not perfect and rational.”

To say that housing prices in San Diego have done what they have done because of a “lack of supply” is like saying the NASDAQ bubble that peaked in 2000 was due to a lack of supply of tech stocks. “Gosh, if only more of these dot-bomb companies had issued stock, and lots of it, this never would have happened.” Huh? Financial bubbles are never about supply and demand – they are about greed and avarice. Greed and avarice have taken over the San Diego housing market.

It has nothing to do with entitlements, or jobs or anything tangible. It has to do with momentum that got started with low interest rates, and now is operating in good old financial mania mode – buy now, at any price, because someone will always pay more tomorrow. Tulip Bulbs in Denmark, the South Sea Bubble, Gold in 1982, NASDAQ in late 90s,…human beings will never stop this craziness.

The total value of the housing stock in San Diego County has nearly doubled since 2000. At the same time, home equity has actually fallen. People have borrowed faster than their houses have risen in value! The current average buyer is taking on mortgage and tax payments equal to 60+% of monthly income. And that is at the low “teaser” mortgage rates that will rise in a couple of years. Those folks will lose their homes in due time.

It’s a game of musical chairs trade-up. When the music stops, it’s going to be catasrophic.

Realtors are the worst people to ask. I have realtor friends that will claim that houses have gone up every year for 25-30 years. When I show them the data from the summer of 1990 when prices dropped 25% in six weeks, they refuse to believe it. Some coastal communities saw price drops of 50% from 1989 to 1994. Prices peaked in spring 1989 and did not catch up to basic inflation until 1999. Ten years, no gains. It’s happened before and it will happen again.

I sold my house here last year and I’m renting. I’ll buy another one after the crash. Anybody that doesn’t own a home here now would be utterly nuts to buy one.

There’s an old saying in the investment world: “If something can’t go on forever, it won’t.” Another saying (from Warren Buffet): “Trees don’t grow to the sky.”

Dapper Dan, take the job and move here if you like it. Just don’t buy a house.

13

DAn

If it is a long term >7-10 yr committment can you afford not to be in the housing market? Owning does something renting will never do, pay you back. Every payment builds equity. Renting is giving someone else more money in their pocket w/ no payback. Rent short term while you find something you really want.

Even if the market levels/dips SoCAL is a huge economic engine, has surfing, a great climate, awesome lifestyle, and more surfing. There will always be a demand for good housing.

14

Most notable difference between now and then is the beurocratic process of entitlements that keeps new developments to a minimum and artificially limits supply.

There are certain parallels to the dotcom bubble, BUT there was no outside influences limiting the supply of dot-coms. Herein lies the difference. And it is different from the downturns that you mention in that it was MUCH easier to develop new housing and neighborhoods in the late 80’s. What took a matter of weeks/months then now takes a matter of years.

BTW<

This is the party line from the building industry, but it’s not true. I’ve been doing housing development financing since 1985, and nothing has really changed. If anything, it’s gotten easier with a string of Supreme Court rulings in the late 80s and early 90s that tied the hands of local communities. State law also streamlined the development process significantly.

Bubbles are demand-driven. Crashes are demand-driven. And low interest rates got demand rolling. Greed and fear kept it rolling. A pin will prick that demand bubble sometime soon. In fact, I think it has started (13% drop in new home starts last month in So. Cal; biggest drop in over a decade).

Where I live (La Jolla) prices are softening; inventory for sale has doubled from a year ago.

15

As always, lot’s of good advice from the slowtwitch experts. I really appreciate all the time some of you have taken to respond.

Another thing about realtors, they are probably the one’s buying all the properties (that’s who bought my house there). They all drive BMW’s now; They’ve been making all the money. Them and the mortgagers, and maybe BMW salesmen. No offense…good on 'ya as the kiwi’s say.

I really don’t buy the supply and demand equation…look at downtown San Diego, where they’ve added probably double the supply from 5 years ago. If people are willing to pay $700/ft there will be plenty of supply. I can’t believe there are that many people able to pay it - wages are not significantly higher there the way they are in the bay area or Manhatten. The only thing might be the weak dollar allowing foreign money to come scoop up properties.

With so many people taking big first and 2nd mortgages, I’d think many of them couldn’t afford to sell for less than they owe, but they can probably keep making the payment as long as their income is stable. Wouldn’t this put a cap on any possible depreciation in prices??? How likely is an actual decline in prices rather than just a flat period?

The problem with renting is that I don’t get a tax deduction, and it is money down the drain. Even if prices stay flat I’m better off buying something. But if they did go down, then I would be in a world of crap because I’d likely be locked into high taxes as well as a big mortgage. If I rented out the house I own here and subsequently rented in San Diego waiting for prices to fall while taking advantage of the current rise in Phoenix prices (not nearly as dramatic as SD), I’d miss the tax advantage as well. It would probably be less trouble and better return to invest in a blended mutual fund for a while.

On topic: rode 65 miles this morning right from my house, half of it on the IMAZ course, temp about 60 degrees. Maybe Tempe ain’t so bad either :slight_smile:

16

The same $250k houses that sold in our area in 2000, are now up in the $700k range.

The “bubble” does worry me, but there has been a steady increase over the past five years. It has to taper off at some point.

They are not building new houses in my area, no land left. Developers are tearing down smaller sub 1000 sq ft houses and building new monster houses on the land, 2-3 story with an ocean view, then selling them for $1 - 1.5M+.

Crazy.

17

The problem with renting is that I don’t get a tax deduction, and it is money down the drain.

Three thoughts on that –

One: Paying excess interest to a bank is “money down the drain” too.

Two: Re-check the math on the taxes, and don’t forget the property tax. I’m saving a thousand dollars a month, after-tax, by renting right now versus buying a house like I’m renting. Even worse, many people are subject the federal alternative minimum tax out here because of the high state taxes and property taxes. What that means is that the huge county property tax bill that folks thought would be deductible on the federal return is not deductible! I have clients crying in their beer because their $20,000 - $30,000 annual property taxes aren’t deductible on their federal returns. They’re paying taxes on taxes. Also don’t forget that your down payment cash can earn interest and offset any higher income taxes you might owe (if any, which I doubt).

Three – Is it more important to (a) pay the least amount of tax, or to (b) have the most amount of money left over after paying taxes? I’d suggest the latter. Saving a couple grand a year (at best) on taxes now in order to suffer a loss of hundreds of thousands later doesn’t make a whole lot of sense.

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Dan to give you an exapmle of how fast the prices are rising in the phx areaa. my next door neighbor, the two story house, bought Jan 2004 for $280k, got an offer for $379k after 2 days on the market. Turned it down and is going to wait until after the new year to sell.

19

On a global basis, one of the benchmark cities for real estate prices is Sydney. After four years of very significant prices increases, the median sale price for a house in Sydney fell by 3.85 per cent to $500,000 in the three months to September 2004.

When it becomes cheaper to rent than own, a price correction is highly likely. Based on my limited understanding of the Southern Cal market, renting is becoming cheaper, suggesting that the odds are pretty good that the southern California market is due for a correction.

20

The people are always going to want to live there part is big. Population is growing in the region, new construction isn’t keeping up. I’ve heard housing equilibrium described as one new house for every 2.5 residents to an area. Parts of southern California are only building one new housing unit for every 17 new residents- builders don’t want to get burned like they did during the last downturn so are more reluctant to have the kind of housing inventory that’s really needed to keep up with demand.

21

Aztec wrote

********Apparently these people weren’t paying attention when prices fell 40% in LA and nearly as much in San Diego in the late 80s/early 90s ****But again, never, EVER listen to an agent about prices. Ask one how much they think prices will go up on average over the next 5 years. Many say things like “approx 10% per year.” Do the math – incomes would have to more than double to support that (remember, incremental tax rates are higher than the average rate).

You nailed it ,

I bought in the 90s ,for 5 years a T bill paid more ,than my house appreciated. I hope Arnold S. gets the state in a better " business friendly mode "Sea world - harbor tour won’t pay the tax bills for everyone.

I enjoyed stories of a home with a for sale sign 450K , a couple telling an agent we will offer 440 K , Another couple walk in ( that have been house hunt for weeks ,saw the value) told the agent we are pre- qualified , Hows 465 K sound ,Sold. This would be an average home, not a super location or one of .

Beach prices appreciate more than inland , Deals hard to find .

22

I just finished a real estate finance and investment class in my MBA program and this was THE hot topic.

If you don’t mind my asking, what are your rent payments vs. what you’d pay if you owned (% if you’d prefer)?

We spent a lot of time examining the differences in these cash flows in our local markets. Based on the idea that if real estate is properly valued the cash flow it would generate (rent) should be pretty much equal to the cash flow being invested (mortgage) . We had some fun applying basic dcf models to real estate in this area (eastern Iowa) and came up with some crazy numbers (even here market values are way too high). There are a lot a parallels with the tech bubble. Traditional methods of valuation have been tossed out the window and the momentum (like you said) has taken over.

Since you mentioned that you deal with this, I’m curious what you think will finally cause the bubble to burst? Will interest rates hit a point and the whole thing will implode? Is the real problem the market prices, or is the problem that people are getting over-leveraged (and banks/lenders are letting them). The real problem (IMHO) is that the real estate market can’t just ‘adjust’ like the Dow, NASDAQ, etc. What happens when the market crashes and home owners suddenly find that the default option (in their mortgage) is in the money? Will a ton of people default, and what happens to the primary and secondary mortgage markets, and all those lenders?

Chris