San Diego Housing Bubble News and Analysis

$225,000? Are you crazy? Don't you know they arent making any more land in Mira Mesa?

3/2 for 225K, wow, I sure hope so! But I don't know. Since April, decent homes in MM listed for 450K or less have been snatched up quickly, and there have even been some price increases on some listed homes. I'm waiting for "summer cooling" of the market, but it doesn't seem to be happening yet.

I'll be delighted if prices would fall another 15%, which would make a decent 3/2 closer to 300K. To get to 225K...

The other thread (SD Home Price Index Blog) suggests that MM is already a little under-priced.

My parents were smitten with this 3/3 townhome for retirement:
http://www.sdlookup.com/MLS-080041253-11...
and it was all I could do to prevent them from offering more than 400K (it came back with a counter-offer of 475K), which I thought would make a fair deal if not a good one. I'm curious, what do the rest of you more experienced Piggs think this 3/3 attached home is worth?

That is funny to me, I guess I'm an uber bear that is pissed off all the time.

I know things are selling now, but there is still a lot coming on the market and prices keep falling, I don't think I am too far off..

maybe I've spent too much time in the sun and my brain has fried a little

$225k at 6% interest rate will cost ~$1350/month with 0% down. Those houses can easily rent for $1700-1900/month depending on condition. PITI - Tax deduction will bring you to about $1200/month. If you put down 20%, you're looking @ PI of ~$1100/month and PITI - tax deduction of about $1000/month. That seems too good to be true for a 3bed/2bath house when 2 bed/2 bath apartment rents for around $1400-1500/month. If rates goes to 8-9%, then I can see that happening, but not at today's rate.

At the bottom of last cycle, ~1996, a 2 bed/2 bath apartment goes for $900/month and a 3bed/2bath house were selling for around $150k. Interest rate I think were around 9% back then. PI should be around $1000/month and PITI - tax deduction was about $800/month.

My point is that at the bottom of the last cycle, buying a home with 20% down will cost you 10% above the rent of a 2bed/2bath apartment. @ 10% above today's rent with today's interest rate, you're looking at price of around $325k.

How much has rent increased in that area in the last few years?

Isn't it a possibility that rents will decrease also? Especially if we are getting a raise in rates perhaps in the near future?

I think it's very possible for prices in mira mesa to still decline a bit. How much, who knows. Interest rates have to raise, and we still have loan resets coming. I don't know many that want to live in Mira Mesa (I want to, but so many seem to stereotype it a bit). If prices start declining in other areas, then MM becomes even less attractive.

Like I said, I'm not an expert, but just trying to make sense of things.

Asian, I know you are very familiar with the area, are you saying the average house price should be 325k then?

I can't see rents decreasing substantially. There's a large and stable student population from UCSD that needs housing. With worsening economy and rising inflation, students are more likely to cut cost by piling up in a big MM house instead of getting a 1BR apt or sharing a 2BR apt in UTC or La Jolla, thus increasing the rental pressure in MM. UCSD students can ride buses for free from MM to campus.

Im a bear, occasional MM watcher, and I dont think you will see 225k median again unless things REALLY REALLY REALLY fall apart. Income, population, and mobility preferences have all changed since 2000 and while I think some of the inflation adjusted numbers used to show this miss a part of the story, they dont support 225k.

I dont think you will see much of a drop from ~350k till the more expensive areas finally start to really readjust.

The thing that could happen to lower prices in MM to the lower half of 200k's is for more college housing to be built near/on UCSD and SDSU. If the college crowd ever started to disappear from this rental market, you would see rents plumet (and with it property values). I wouldnt hold your breath though, college housing isnt something that is politically popular to build (as in 'HELL NO we won't zone!'), and recient ordances like the "mini dorm" rules will only make the rent unaffordability (for college students)problem worse.

OK, I was unaware of a large student population in the area, because I admit, I'm not familiar with it. So there are more things to consider then

Rent has gone up about 4%/year over the last 15 years. Like other have said, I think the renter pool in MM is much higher than others due to its proximity to UCSD and various high tech job centers.

What I'm trying to say is $325k at today's rate is where it's reasonable when comparing rent vs buy. It gives similar rent vs buy ratio as the bottom of the last cycle. We can very well undershoot much more this time than last time, so it could go much lower, but I won't know until it happen. Same could happen if rates goes higher and drive down price even further.

I agree, taking all things into consideration that could happen, I still think that MM has some declines coming it's way..

I agree. There are many factor that would make prices in MM fall even further. But if you buy it as a primary resident like I intend to do, I think a lot of the risks are greatly reduced in term of monthly payment with a fixed loan. I don't advocate right now, but it doesn't hurt to start looking. If you're looking for a primary resident, there might not be a single house you'd want to buy at the bottom. Once it becomes cheaper to buy than rent, I think it then comes down to if you can find the house you'd want to live in.

Keep in mind that Mira Mesa has a variety of homes. 3/2 can describe a 1,000 sq. ft. home or an 1,800 sq. ft. home. My crystal ball says that those homes on the larger side will probably hit near Asianautica's $325k number. The smaller ones... they'll probably land somewhere in the mid-high $200s.

noone,

this MM 3/2 at 1600 sf is on Craigslist for $2350.
http://sandiego.craigslist.org/csd/apa/7...

It's not the newest, nicest, biggest in MM, and not even in a great area of MM. If the best would land around $325K, then this should land around $300K, making the price-to-rent ratio 10.6 (300/(2.35*12)), which seems way too low.

The historical norm for the price-to-rent ratio in SD, before the recent bubble, was around 16 (which makes this home $450K).

I think your math is a bit off. I think you are forgetting that you have to pay the property taxes first. Then the deduction lowers the annual income that you have to pay taxes on. It's not a tax credit.

You are correct that $225k at 6% with 0% down P&I will be about $1,350 (can you even get 6% with 0% down these days?). Adding taxes an insurance gets you up to about $1,600 a month. If you're paying 1% in property taxes on $225k that's $2,250 a year. Assuming the 30% tax bracket, you will be reducing your taxes by about $675 a year or $56 a month. So even including the tax deduction you're monthly cost is over $1,500 not $1,200. For an older & smaller 3/2 in Mira Mesa that is probably the going rent.

Obviously it's hard to know just what will happen, but I would hate to make a generalization on just one home's asking rate. That's probably someone who needs to take in that much in order to pay their mortgage each month. It doesn't mean that they are going to get it. Looking at it from another perspective, that home sold for $242,500 in 2000. If it sold for $325 in 2008 that would be 34% increase in 8 years. That's over 3.7% per year. What kind of ROI should we expect?

Really we would need to look at actual rents being paid, and we would need a sample size larger than 1.

There also seems to be a reasonable amount of military given it's next to Miramar. These are people who may be moving around after a few years here and there.

Ok, first time poster, but been trolling around here for awhile. I own a 3/2 in MM so I was interested in this thread.

Anyway, I don’t think that rental is a good comp for the MM rental market. While that is in one of nicer parts of MM, I couldn’t see it renting for more than 2100. I’d figure 1950 is more realistic.

Here are my thoughts on the MM rental market. It is strong due to UCSD, Alliant University, military, and it is affordable for most people. I bought 6 years ago knowing I couldn’t afford it on my own and I would have rent out the other two rooms. Never less $500/ month + 1/3 utilities, usually closer to $575/month. Always had multiple responses within a day, and I only posted on craigslist. Roommate market is different than renting an entire house, but I’ve rarely seen a house stay empty for more than a month - besides the foreclosures that is.

That said, I run a lot and I am watching the asking prices continue to fall. However, in the last month I have seen an increase in the houses that have sold and are now occupied (don’t know if it’s owner occupied or rental). Prices still have a way to go, esp. for the properties that need some work.

Just my random thoughts for the night.

I agree that a sample of 1 is too small to rely on. But I've been tracking the rental market in MM for about a month, because I actually considered renting there, and this one doesn't seem totally unreasonably priced to me. There was a 4/2 townhome (1800sf) in the Tierra Mesa complex, a neighbor of the 3/3 home I posted the link to before, and it was asking for $2200 on Craigslist and went very quickly -- it's an attached twin home with a tiny backyard/sideyard in a dense complex.

Here's another 3/2 (townhome?) with a tiny yard asking for $2200:
http://sandiego.craigslist.org/csd/apa/7...

I'm only interested in NW MM, which is maybe the most expensive part. I'm sad to report that after a month, I didn't find a single 3BR house (with wooden floor, which is really important to us) in NW MM for under $2000. (Instead we'll rent a 2BR condo in La Jolla.)

Still, there was a comment earlier about maybe the nicest 3/2's in MM would land in the low 300's, and I'm just not sure about that (though I would luuuuuuuurve for it to be true).

Nice 3/2's in NW MM is asking for around $450K now. I'm hoping for another 15% drop, which would make it around $380K. SDR says in another current thread that he can't see another 20% drop in MM prices unless there is some extraordinary external factor, like a large rise in unemployment or a big spike in mortgage rates. Oh, and he also says that lately investors have been mopping up the lower priced inventory in MM.

This is true... from what I have seen there seems to be alot of activity for these homes that are listed in that 330-350k range based on the location. My read on these are that they are indeed investors looking to find cash flow or break even properties, then to hold them and then sell them down the road. Will these current investors continue to support the new foreclosure inventory that comes on the market? I don't know but for now it seems they may be able to.

Also one thing that is never discussed are bulk purchases. How many of these bulk purchases will be made in the future? I don't know nor do I claim to know but I do know that there are investment groups that approach lenders for bulk purchases of many properties at discounted prices. Thus these foreclosure inventories never hit the market.

No I am not trying to say that bulk purchases will support the market either... yet to me, I really don't see alot of 225k 3/2 homes coming on the market in MM. Could a few spot sales turn up? Yeah perhaps if you want to live right on Flanders or Capricorn or something like that. Also perhaps some total scrapers. Okay that could happen. Yet to think that the majority of 3/2 homes will be at a median price of 225k or 250k... I am not of that opinion at the moment unless something serious interest rate hikes or unemployment happens.

I guess we will see.

Houses in MM are flying off the shelf because they are the only game in town north of the 52, south of the 78, and still within a reasonable distance of the ocean (IE no ESCO or Romona). If you want to live in this area, and are looking to buy, your choices are some superfixer upper in Poway or Rb, or a MM sfr. When the "fortress" areas finally start taking their Alt-A/ Option Arm licking's, new games will open up in town and MM will move lower. This will take time, something like late 2010.

Also, as for rents. I have been tracking rents in MM since early 06. I have noticed a steep rise in asking prices as of late (2008). I dont have any clue why, but I am guessing it falls along the same lines as being the only game in town. Where else can you rent a 3/2-4/2 for under 2000/month in north county? This wasn't hard to find last year, but has mostly disappeared now. I guess alot of people are trying to save cash, and influencing demand.

I see no more than a 20-25% drop in the future. I use to think more, but this rental surge has caught me off guard (I thought rents would take a hit with the faultering economy too, but this has been discussed plenty before in other threads). I still believe MM 3/2's will go sub 300k, just not as much as I use to.

I'm only interested in NW MM, which is maybe the most expensive part. I'm sad to report that after a month, I didn't find a single 3BR house (with wooden floor, which is really important to us) in NW MM for under $2000. (Instead we'll rent a 2BR condo in La Jolla.)

Right now on Craigslist there are 23 listings of 3BR and 4BR houses and condos in Rancho Bernardo, and 12 listings in Rancho Penasquitos, under $2000. I think everyone will agree that MM is cheaper than both RB and RP.

Just because someone wants to get 2200 or 2300 for their 3br rental in MM, does not mean that the market will bear that price.

Also all these "investors" snapping up 300-350k properties in MM will soon start bringing their houses on the market and that will have a serious impact on rents.

and just a side note, summer is always the busy time for MM rentals. The college crowd is to blame for that. They want to move in the summer when they are off, not during midterms. When I was looking in 2006, I got run out during the summer. LL's were calling me in the fall. (Management agency called me about our approval on a house we didnt even know we had applied for)

DWCAP, rental rise in the last few months took me by surprise as well. If you have a nicely remodeled 3/2 home in MM, you might be able to get 1900-2000 for it easily, considering the rental stock right now and how fast it flying off the market. I think gas price might have something to do with it as well. You're right, MM is the only game in twon right now.

esmith, I've looked up the rental of PQ on craigslist and those that are under $2k/month are either condos or are small old houses. Most of those are repeat of the same one on 9930 Caminito Bolsa, San Diego, CA 92129 as well, which is right next to low income housing as well. Not all PQ are nice, even though they're in PUSD.

My number are rough estimate, but I use the same assumption for today's number as 1996 numbers. So, the home ownership premium stays the same.

No you can't get 6% with 0% down, but I'm trying to make as fair of a comparison as I can. You forget that you will get a tax deduction on the interest as well. I think the most fair comparison between rent vs buy would be rent vs Interest + tax + insurance - tax deduction. You shouldn't count the principal payment because that's not money you're throwing away.

Right now, I see all the 1100-1400 sq-ft 3/2 houses in MM asking for $1800-2000 in rent. So, lets run the # again, shall we?

$225k with 0% down @ 6% will run you ~$1100/month in interest. Tax @ 1.1% is $206/month. Assume insurance is ~$200/month. That's $1500/month before deduction. Assume 25% fed tax and 9% state tax, you're looking @ 34% tax saving on $1300/month which comes out to be ~$490/month. So after tax deduction, you're looking ~$1000/month. This house can easily find renters @1700/month, considering apartments in this area is going for $1500/month.

You guys are way underestimating the true costs of being a landlord, and are thus overestimating potential profits.
First, figure one month a year of vacancy, so take 8 1/2% off your revenues. It takes time to clean, fixup, then advertise for & find a tenant, then perhaps they cannot move in for a while once you've settled on one, etc. It really adds up.
What is your budget for major repairs, as broken down into a monthly figure? New roof soon? Water heater? Furnace? Painting all the exterior siding and trim? Perhaps new windows? The Mira Mesa houses are largely tired old places, at least the likely rental candidates. What about lawn maintenance and weeding? Figure $50 - 100 a month depending on size. BTW, tenants can't/won't do it, whatever they claim. There is also the value of your own time, gas, late-night calls for toilet stoppage, etc. And the fun really starts when you have to do an eviction.
I've rented out houses and apartments for many years, and the costs invariably exceed your expectations and the rent revenues per year always underperform. Only the appreciation in value has made it worthwhile.

Since I work at UCSD I haven't even looked into Rancho Bernardo or Rancho Penasquito -- b/t the gas price and commute time, I decided it wasn't worth it. I'm sure the students would consider it even less: most don't have cars, the buses aren't free that far, and they prefer to live close to other students.

Maybe rental prices are seasonable, but most of the MM rentals change hands in the summer and ask for 1-yr leases, as do most rental markets near universities.

Rentals are even more expensive in UTC (relative to their buying prices), we found a 2BR condo for just under $1800 and we count ourselves lucky. I'm really just amazed at the volume of units that appear on Craigslist daily (hard to estimate how many are new, say 30), and somehow or other they all get rented.

I wouldn't be surprised if investors are also going after the UTC/La Jolla condo market. Certainly a lot of the more interesting listings I looked at went pending recently.

As I mentioned before, I'm renting a 1700 sf 4br with big backyard in PQ for $2100/month. Why would I want to pay $2000 for a 1100-1400 sf 3br house in MM without a backyard and with worse schools?

Most prices you see on Craigslist are wishing prices, no one in their right mind is going to pay that much.

It would take me 15 minutes to drive to UCSD (56 to 5). The commute from Mira Mesa by car would actually be _longer_ (I'd have to take city streets, it could take 10 minutes just to cross Golden Triangle). Much of MM isn't served by buses. Neither MM nor PQ is a very good option for UCSD students, in my opinion.

we found a 2BR condo for just under $1800 and we count ourselves lucky.

Again, right now on Craigslist there are 25 listings of 2BR condos in UTC below $1700. For $1950, you can even get a 3BR:

http://sandiego.craigslist.org/csd/apa/7...

If mortgage interest rates increase over the next couple years I could see the smaller/older 3/2 MM homes dropping into the mid-$200s. I wouldn't think they'd get down to $225k though.

Mira Mesa has a very central location for a lot of workers. The home prices there really should be higher than for some of the North County communities. I'd say the same thing for the South Bay communities - they're a lot closer to decent employment.

I think there's some room for rents to drop, too. The extra money people are spending on gas and groceries has to come from somewhere, and looking for the cheaper rental is the easiest way to do that. There's also the employment situation. All those refugees from the RE-related businesses will replace their jobs with lower paying jobs, thus reducing the amount they have for rents.

It's just going to take some time. Rents down by 10% + mortgage interest rates up by 2.5% or 3% and a $250k MM 3/2 is a possibility.

Purchasing in Mira Mesa vs. Rancho Penasquitos should depend heavily on expected appreciation. On that score, MM ranks low for a number of reasons. The houses are old and need a lot of updating. The streets are crowded and full of parked cars and big trucks. The one and only poorly designed main drag, Mira Mesa Bl. is jam-packed and destined to get worse. Add now the possibility of mini-dorms as discussed here, and you have a neighborhood in decline.
Pay more for a RP neighborhood and you get a decent future. Hwy. 56 changed everything. Though it can get busy in a rush hour, it is generally 65 MPH. It is physically designed to take a third lane in each direction, so that will eventually happen, as is happening to 52.

EconProf wrote You guys are way underestimating the true costs of being a landlord, and are thus overestimating potential profits.

Aren't there standard metrics that professional real estate investors use? Don't they typically look for cap rates in the 8-10% range? Merely covering the costs, as many of these posters have alluded to, is nowhere near sufficient; investors need to earn a profit as well to compensate them for the cash flow risk and the asset price risk. Given the risks involved, and the illiquidity of the investment, I would demand at least 20% profit.

The current crop of investors buying rental houses are "dumb" investors; they are assuming that eventually the asset prices will appreciate enough to overcome any rental losses. The owner of the house I am renting, for example, is losing money at a steady rate (8% to the realtor managing the property!); I wonder whether they have thought through the finances. I doubt it.

It will take a long time to purge the system. People still have faith that San Diego house prices go up.

Noone - Are you suggesting that the total tax benefit is only $56 per month ? Or did I misinterpret your statement. The $675 would be the tax benefit in a 30% bracket for the property taxes alone. Interest is also tax deductible and constitutes a much larger amount (13,500 in the first year).