San Diego Housing Market News and Analysis

The San Diego Union-Tribune today ran an article about the rising rate of mortgage defaults in San Diego. It's a good article, but—brace yourself for words you never thought you'd read on this website—their interpretation of the data is more negative than my own.

Wow, my fingers almost seized up just typing that.

Let me just be the first to admit that these monthly reports on the local economy have been less than thrilling. For better or worse, my intent with this website is to give an accurate assessment of what's going on, and if what's going on is "nothing" then there's little I can do.

As noted in the last couple monthly housing reports, we are starting to see some significant regional divergences in condo price movements. While the countywide median condo price is still slightly positive for the year, a full 25% of all San Diego zip codes have seen year-over-year condo price declines of 5% or more. So which areas are declining, and which are still hanging on? And what do they have in common?

To my amazement, no less than my former analytical nemesis—the San Diego Union-Tribune—recently published a perfectly cordial article about this very website. That the UT has gone from exclusively rehashing CAR propaganda to interviewing some bearish-on-real-estate jackass with a sporadically Victorian-themed website just goes to show how much sentiment has shifted in the past year. But while interesting, the sea change in local sentiment is not what this article is about.

Last month's prediction of further deterioration in the condo market has been spot on so far, and my unique instability indicators predict more trouble to come. Meanwhile, purveyors of E-Z credit are finally backing away from the ledge. I can't believe I'm actually saying this, but: do I hear hissing?

Many thanks to reader Matt for tracking down a copy of the academic research paper I discussed on Monday. The paper can be found here. I have just finished reading the entire thing, but scholarly tone notwithstanding I continue to think it's hogwash.

I don't usually spend time discussing media articles of the "there's no housing bubble" ilk, as I've already said my piece in the Bubble Primer series found on the top of the homepage. But there's an article making the rounds today that has been sent to me enough, and attempts to take a novel enough approach to the argument, that I thought I'd write a little something about it.

Reader Christine poses an interesting question:

I work for an architect downtown--he just spoke with someone today who said that the cost of building materials is expected to triple as a result of Katrina and having to rebuild New Orleans. Since there are barely enough supplies for the US without having to rebuild, how do you think this will affect the housing market? Would housing costs go up because it is now even more difficult to create new supply?

Like I said, a good question, but the answer is no: a rise in the cost of construction materials will not have a notable influence on San Diego home prices. I say this for a couple of reasons.

Single family homes are hanging in there, but the condo market is starting to look pretty sickly. Unless the Fed comes to the rescue yet again, San Diego real estate's long and inevitable decline may begin very soon—if it hasn't begun already.

The San Diego job market is booming--if you're in construction. (Otherwise it's pretty mediocre). Meanwhile, a nationwide recession looms, but the local economy soldiers on...

Several folks have requested at one point or another that I chart the correlation between interest rates and housing prices, in order to see if rate movements are a good short-term predictor of price movements. I was sort of dubious of this idea, but being the nerd that I am I had to go ahead and graph it nonetheless.

I have routinely argued that the inevitable slowdown in San Diego housing activity and price growth will lead to local economic hardship. This topic is discussed in some detail here and here, but the basic reasoning is as follows:

• Flattening prices will remove the artificial "wealth effect" boost that the San Diego economy has enjoyed over the past few years.
• Flattening prices will also remove the equity-growth safety net that has kept homeowners out of financial trouble during the same period.
• Given the enormous number of San Diegans employed in the housing sector, a slowdown in housing activity may put a lot of people out of work.

If our friends over in the United Kingdom are any indication, I could be onto something. The UK, as you probably know, experienced a home price bubble of downright San Diego-like proportions. As this graph shows, the similarity is quite striking:

The trouble with real estate sales data is that it is invariably out of date. DataQuick's stats for June, for example, consists of all sales that closed in June, mean that those sales were negotiated in May or even April. Furthermore, DQ takes its time getting the data all cleaned up, and by the time I get the June numbers it is almost the end of July. (I am looking into some ways to get a more timely if less precise picture of sales activity, but that's not ready to go yet.)

Inventory data, on the other hand, is real-time. I can get the number of homes for sale right now. But while there is no lag, MLS inventory has its own issue: it only takes account of homes listed for resale on the MLS, excluding many units available in new developments.

I mention this not just as a reminder of the importance of looking at the market in many different ways, but also because it's important to keep data limitations in mind while translating individual stats into a "big picture" interpretation of what's going on. This is especially true when we see a bit of a divergence between sales data and inventory data—as we did this month.

The local economy isn't showing any signs of short term trouble. Notices of default remain flat, indicating that those overleveraged San Diego homeowners haven't gotten themselves into serious trouble just yet.

Reader Jonathan writes:

I agree that the “everyone wants to live in San Diego” mentality for the recent status of the real estate market is ludicrous. However, what I believe is missing from the argument is; why San Diego? Why haven’t we seen the same speculative bubble happen all across America?

This is an interesting question. Low rates and rock-bottom underwriting standards are national phenomena; why have prices grown so much faster in San Diego than in most of the country?