San Diego Housing Bubble News and Analysis

By 2001, San Diego had enjoyed a nice housing boom. Since bottoming out in 1996 after a nasty housing downturn, the price of the typical single family home had risen by 74 percent. As of 2001, adjusted for inflation, San Diego homes were more expensive than they'd ever been (at least since the 1970s, which is as far back as the available data goes).

At this point, one might have expected home price growth to slow down or even flatten out. But the show was only getting started. The typical home, already somewhat richly valued, would go on to nearly double in price in just a few years.

Interestingly, this price explosion occurred at a time when rents were growing fairly modestly. This is somewhat strange because the factors that typically drive home prices, such as incomes, employment, and population growth, also affect rents. Yet after 2001, while prices of already richly-valued homes increased 98 percent and the monthly payments on those homes rose 88 percent, rents only increased 31 percent.

My pal Ramsey is a retired real estate broker and grizzled 1990s housing bust veteran. When he's not dragging me to Chinese restaurants on the Department of Health watchlist, he spends his time thinking about how this particular real estate cycle is going to play out, placing a special emphasis on new age lending practices. A couple weeks back Ramsey sent me an excellent (and very long) treatise on foreclosures, which I reproduce in its entirety below.

Foreclosures, Real Estate Financing, and Their Impact to the Real Estate Market

Starting from 2002, every participant in the broad real estate arena has been trained to ignore financing as an integral part of all real estate transactions.  It is so easy that it seems anyone who wants a loan can get a loan.  No down payment?  No credit?  No problem.

So where do we go from here?  As most of you know, since 1982, my specialty in real estate was foreclosures.  I have never seen a cycle like this before so I have no historical comparison to draw from.  All I can offer is some thoughts and points to ponder over:

There is no question that the San Diego housing market is showing a bit of strength. The real question is: what does it mean? Let's have a look at the stats and discuss...

Prices

The size-adjusted median price, aka the price per square foot, increased from the prior month for both detached homes and condos:

Well hello there. I felt compelled to check in because I've been feeling guilty about my recent habit of exclusively linking to my voiceofsandiego.org articles in lieu of writing proper Econo-Almanac-only content. I don't mean to make a habit of it. But I've been occupied with other pursuits, and at times like these I need to meet my Voice obligations first, lest editor Scott Lewis administer one of the savage beatings for which he's so well known. (Incidentally, one of the aforementioned pursuits was setting up a website for the financial advisory firm I joined. The site will include occasional articles on finance and investing, so some Piggingtons may find it of interest).

Alright, I realize that the most inane possible genre of blog post is the one where you apologize for not writing more blog posts, so let's move on. There are a few items worth noting...

Prices

It was another down month as measured by the size-adjusted median price:

Well, he finally came out and said it outright:

NAR Chief Economist David Lereah said the data held "mixed news" but it broadly signaled a stronger housing sector with inventories and sales stabilizing.

"The housing contraction has bottomed," he said.

So there you have it -- with an apparent lack of any doubt or question, Lereah called the bottom on December 28, 2006. Remember this one for the history books, my friends.

Last week's NY Times piece on home price metrics (login required) prompted some forum discussion on the accuracy of the Case-Shiller home price indices, which I use for all my long-term price charts. It ends up that I looked into their methodology a while back and have been meaning to write about it -- so now seems like as good a time as any!

To start with, let me quote from an old voiceofsandiego.org piece as a means of reviewing the problems with the median price:

There are no big surprises in the latest batch of housing stats, so I don't have a whole lot to say that the charts don't say themselves. Let's have a look.

Prices

My preferred measure of home price changes, the median price per square foot, was down on the month for both property types, with detached homes notably smacked down after the prior month's attempt at improvement:

OK, here is the whole series: home prices, monthly payments, rents, and rates, for as far back as the complete set of data goes.

The first chart displays the percent change in inflation-adjusted San Diego prices, payments, and rents since 1977. The second chart displays the same information in nominal terms. Mortgage rates are indicated on the right axis in both charts.

At this point I am clinging to a shred of hope at least a few minutes will elapse before someone asks for a followup chart.

I kid, I kid. OK, onto the good stuff:

Here are the pre- and post-1990s correction rents, prices, and monthly payments as requested by a couple of commenters:

The permabulls are drooling all over themselves with glee about a recent study indicating that the median San Diego home seller in recent months collected a tidy 91% profit on his or her home. Of course, this doesn't include transaction costs, improvements, or cash-out refis along the way... it is just a comparison of prior sale price and recent sale price. Even considering all that, though, 91% sure isn't bad.

But this is all a waste of perfectly good permabull drool, because the statistic in question has nothing positive to say about the future disposition of home prices.

The following slew of charts depicts October's housing market activity here in San Diego. Executive summary: the slow grind downward continues apace.

Prices

From the prior month, median prices declined 2.7% and 1.3% for detached homes and condos respectively.

Some folks didn't cotton to my conclusion that the DOF population data was probably better than the Census Bureau data, so I thought I'd clarify my reasoning.

I do not pretend to know much about the ins and outs of tax returns vs. driver's license issuance or for that matter any of the other methodological differences between the two organizations' figures. Nor do I really care to take the time that would be required to dig into it (for reasons that are explained below).

I mentioned in the last article that positive job growth belied a population decline. This was, for me, the deciding factor. Let's look at those numbers:

It's time for the belated monthly sales data roundup. Let's dive right in...

Median prices were down year over year for all involved:

It definitely appears that inventory has peaked for the year: