San Diego Housing Bubble News and Analysis

I looked at this link and the first thing that shouts is not the headline figure but the split by percentile.

The 75th percentile and above is stable to even rising. The 25th and below is falling the fastest .

To the extent you can rely on these figures (and there is no mix adjustment here etc), this is evidence is against those who argue that the upmarket areas will follow the cheap areas .
Any comments on this crude conclusion?

My only comment is that those who track the housing market by the countywide price median get nothing more then.... well the countywide median.

What matters to me as a wouldbe buyer is the housing market in my zip code, for the type of housing I want. I don't care what is happening in North Park, Eastlake or Escondido.

I care about interest rates, foreclosure and NOD rates, inventory, active/pending ratios, and other metrics.

It is an easy statement to say this or that submarket is holding up well or the crappy markets are not. That is a softball pitch. I do maintain that when it is all said and done the more desireable areas will come down. How far, I am not sure. I am not as pessimistic as some people here on this board who are predicting 50% drops in Carmel Valley and the likes. I guess in 2010-2011 we will have our answers. Until then, to me the data is still in flux.

Beginning of all this, I thought we'd drop 30% nominal, 50% real after adjusting for inflation, currency/debt devaluation. We've reached that point already. Now, I think things are going to drop another 20% in nominal terms, and more if the economy really falls out from under us, which is a real possibility. Oil shocks and commodities may tip the balance in that direction.

What really scares me is the financial scene. It's an absolute mess. The leverage is frightening, asset values based on revenue streams that were never unsustainable. Levered up during growth and compressed down as we contract. The books just don't balance. Widespread financial pain, foreclosures, bankruptcies and dislocation is unavoidable at this point.

I always think back, compare to the first job I had out of college working on an MBS trading desk on Wall Street, cleaning up after the S&L crisis, RTC days. It was my job to analyze and assess whole loan pool characteristics, help the traders figure out how to slice-and-dice the pools, packaging securities. The cycle we're going through is easily 3-4 times worse, metrics I've seen.

So I think we're going to see things continue to deteriorate for the next 2-3 years, with another 20% off current prices. Not sure what will happen with inflation. Helps debt issues obviously, though a serious contraction might result in deflation, which would exacerbate asset and debt pricing/value disparities. No good sides to this. We've run out the clock.

No areas immune either. I think this one's going to hammer rich, middle and poor alike. Staggered effects on the wealthier areas, in part due to better loan products, in part due to Bush policies of wealth redistribution (towards upper quintile). But at the end of all this, there are going to be alot of wealthy people who ended up losing their shirts. Also, I think lots of retirees are going to get creamed, impacted by declining value of assets and savings.

Gandalf, you are quite right that overleveraging combined with a looming deep recession will interact to worsen the price collapse.
In past bubbles, going back centuries, it was a mass hysteria combined with credit innovations and "gearing"--what we would call leverage--that combined to run up prices of tulips, stocks, or land, etc.
What made this housing bubble to so overextend itself beyond normal realities of price/rent and price/income ratios was the new, higher leverage possibilities inherent in 5% down, then 3% down, then no down financing. For a while, there was less $ outlay to buy a starter house than to come up with 1 months rent + security deposit. The temptation was too great for many lower income folks, and the eventual collapse became inevitable.
Here is where this over-leveraging at the low end may be relevant to the divergence we are seeing among property price categories. Could it be that the lower leverage in the upper price categories will protect them, especially when combined with the greater income inequality trends we've seen in the past few decades? If so, that would make for the richer neighborhoods not falling as far as the others.

But at what point did (will) yesterday's 75th percentile become today's 50th percentile? Are individual prices being charted?

Good point Querty, hence need CS.
EconProf. What I find really curious is how and why prices in places like Texas did not explode in line with SD and hence are stable now. In fact Texas is cheap. Compare say SD with San Antonio: quite similar except for the coast and industries. The same financial infrastructure with al its imperfections were as much in place there as in SD or any other of the blow-out locations. Does Texas have recource mortgages by any chance?

Don't know about Texas recourse or nonrecourse mortgages.
But one factor best explains why Texas did not have a bubble comparable to ours: cheap land.
Texas is flat, no ocean, mountains, or TJ next door to inhibit building. Plus a low-tax, developer-friendly government. Throwing up houses is easy and cheap, dependent on labor costs and materials, which didn't much go up.
With no bubble to pop, their house prices aren't falling much, and are even rising in some areas. Having oil, natural gas, and ag. also helps.

Unless we start getting our water from the ocean we probably won't be stretching that much farther east.

Then too, there's the freeway situation.

As for the upper end, I think the luxury home market is skewing those numbers up. They never did slow down that much on the development of the home in the $3mil+ ranges, even though the sales volumes dropped. It's been a while since last I looked, but we did have a 2+ year supply of standing inventory at that time and I'd imagine those numbers have probably gone up.

Given the overall sales volumes, it doesn't take that many additional $3mil listings to skew the listing price median up.

Unless the Santa Ana's stop or all brush is cleared from the entire county, I dont think many people will want to move east after the last two major fire storms we have had. But the water situation is another saga.

Doesn't Eastern end of LA,San Bernardino and Riverside have the same problem, regarding with water and fire threat? I bet if CA remove Prop 13 and increase property tax to over 2% like TX, and make it as easy to build as TX, we would be in very similar situation as other cities in TX.

Surprised at you Piggs, blaming it all on land prices, permits and big bad CA government. Real estate is a regional business. This bubble is regional in many regards. Speculation in downtown San Diego, for example, results in skyrocketing real estate in -- you guessed it, Antarctica. Not.

There are absolutely pockets in TX where prices got ahead of values. On balance, they didn't appreciate as much as "Canary in the Coalmine" San Diego, and won't suffer the same declines as a result. Compare with the S&L speculation and collapse in the 80's which absolutely hammered the midwest. I can remember parts of Oklahoma with near 'ghost towns' due to S&L problems and the collapsing of oil prices (and associated speculation). Coastal regions were certainly affected, but less so.

The whole story isnt evident in places like Fresno, or Bakersfield just by saying it is flat, hot and no ocean. Those places boomed becuase of the unaffordable prices in SF or LA. People were willing to commute 90 minutes or more, each way, to own their houses. Those cities bubbled because of coastal unaffordability, which is in part due to mountains and oceans restricting building space.

Lending institutions tend be somewhat regional as well, and CA, FL, NV, AZ, etc. had some of the worst culprits in this whole debacle, Countrywide, IndyMax, Wamu, etc.

I'm seeing a lot of theories to explain the different prices of housing San Diego vs. Texas. I still claim it is mostly land and lot prices, + a hostile government here that loves to skewer developers. You guys need to talk to some builders to see what they have to pay for lots.
A quick look at Craigslist for Dallas real estate immediately turned up, for under $30k, a big lot allegedly 20 minutes from Dallas downtown, 20 minutes from Fort Worth downtown. Allowing for some exageration by the seller, and this example's admittedly anecdotal nature, it supports my thesis. I didn't take the time to drum up more examples, but they seemed to be there.
What would a building lot 20 minutes from downtown San Diego cost? Here's a start: $300k for a scraper in Scripps Ranch after their fire 4 or so years ago. (SD Realtor: you live in Scripps...is this about right?).
Another example I was involved in 3 years ago. 50 x 140 standard lot in North Park, so-so neighborhood, sold for $600k with scraper house on it. In fairness, I think the same lot now would go for $400k. But even with the current pullback, land and lots here are incredibly expensive.
We've got canyons, an ocean, an international border, military bases, and NIMBY'S throughout.

I don't think this logic works though. You're forgetting that lots of places bubbled in this national RE frenzy that took place over the past few years, including many areas that are very developer friendly (Phoenix, Las Vegas).

I think it was a much more complex phenomenon, fed both by supply and demand, and a sort of "mob" investor mentality. Here's how I saw it play out:

1) Popular "destination" cities like SD, Miami, SJ, and LA experience a economic boom - lots of population moving to those areas from both well-off retirees and high paying jobs. This exhausts the supply of housing on the market, causing prices to rise rapidly, which is supported by those well-off retirees and six figure income jobs. Builders, still reeling from the previous half decade of bubble deflation from the early 90's, are slow to react and build new homes, exacerbating the problem (timeline 1998-2000)

2) Savvy investors notice this trend and invest into those early stage bubble cities. pushing prices higher yet. (1999-2000)

3) Builders start buying land and planning developments (2000-2001)

3) Less savvy investors "follow the leader" and start piling in (this occurred right as the tech bust happened, so there was lots of capital looking for a place to rest). Prices go even higher. As prices go higher in the original bubble cities, investors start looking at cities with similar profiles and investing in them as well, causing those cities to experience an increase in pricing as well. (2001-2002)

4) Major developments by builders start hitting the market. By this point we've had 3-4 years of double digit appreciation in the bubble cities. Both home buyers (afraid to be "priced out") and investors (afraid to lose out on those double digit price increase that with leverage make the best stock fund returns look meager) snap up the new houses. Builders plan even more developments (2002-2005).

5) The idea of RE as a path to easy wealth starts spreading based on those investment returns (now considered a "trend" even though the trend is only about 4 years old). More investors jump into the fray (frequently just "ordinary Joe" type investors with little investment or economic savvy who attended a "get-rich-quick" seminar). A LOT more money suddenly enters the fray, and we get the hyperinflation of home values that we saw as we approached the peak. "House-flipping" is born as appreciation rates soar high enough that a large profit can be made even after transaction costs just by holding a house for a year. Frequently flippers are just selling to other flippers in a massive Ponzi scheme. (2003-2005)

Vastly simplified, and not mentioning the effect that the banks loosening their standards had on allowing all those "ordinary Joes" to overleverage themselves in investing, but more or less how I saw the bubble unfold.

Why didn't Texas see all these events? Dunno, but a lot of very similar locations to Texas did. I can't see the higher property taxes being such an overwhelming factor though, as Texas also doesn't have a state income tax, which would even it out in terms of dollars spent from the overall budget on taxes.

Excellent post SDEngineer!

I would agree that the run-up was more based on speculation than fundamentals such as taxes...

If you track the last couple of CA real estate climbs, they tend to really ramp up hard the last couple of years before they burst. Having lived through them, I can tell you that it's mostly everyone wanting to get in on the appreciation. It's all everyone talks about at party's and work. This one was really different in that the loan business started to give anyone that could fog a mirror a "no money down" loan. So everyone got into the game.
Having gone to Houston and Dallas on work related trips, I've seen new developments selling houses at very low prices. They just keep moving the housing developments further out from the city centers. But land is dirt cheap there. In 2004 I saw new 3/2 SFR's going for $180K that were about 30 minutes from Houstons' city center. But the very swanky Galleria area had many homes for $1M.

Hello, I have lived in several different regions and the reality is California is different. There are several reasons for this. First, low property taxes make owning real estate to use as a rental property very attractive. The high real estate taxes in many other areas of the country discourage investors. I know there will be some disagreement on this point but it is a reality. The behavior of both investors and home owners here is in my opinion far from the norm in other areas. I have lived in the midwest and on the east coast. In those areas of the country people are more likely to not leverage property like the homeowners in California. The mortgage industry is less likely to be involved in making loans that people cannot afford and homeowners are more likely to be conservative in taking on debt. I will happily admit these are just some observations and no random sampling was done to produce this information.

I currently live in a neighborhood where a realtor bought a home, took out all the equity, moved out when the house was sent notice of default and is now renting the home to far more people than the house can accomodate to squeeze more money from the house while the bank tries to finish the foreclosure process. In another community this would be remembered and this realtor would not be able to find clients ever. In California this realtor will move and start over somewhere else with a some poor lenders money in her pocket and taxpayers footing the bill. While this could happen anywhere, in California we are no longer surprised. In many parts of the country this would be considered outrageous. We need to start considering that too much unethical behavior is overlooked here.