San Diego Housing Bubble News and Analysis

Totally agree. I have personally talked 3 friends of mine out of buying hideously overpriced SD real estate in the last 3-5 weeks. I am proud of myself and they are feeling like they dodged a bullet that had their name on it !

After I pointed out the facts to them, they breathed a heavy sigh of relief and put their checkbooks away when they saw the reality of it all.

Friends dont let friends buy SD real estate.

I am doing the same thing, trying to convince my friends not to buy now.
If more and more people stop buying now, price definitely will go down.

Think about this. The only reason that "now is a great time to buy" for a buyer is if they think the long term pricing trend is stable or going up. WHEN it becomes apparent that the trend is going down, that motivation is no longer applicable. The more the trend declines the less motivation there is to buy. At whatever point the majority of buyers come to perceive that the price trends will decline a long way the volume of sales will drop off so much that there won't be hardly any sales at any price.

Already we can see people who might want to get in but who are recognizing that now is not the right time. Think about what it means when a friend or casual acquaintance can dissuade a potential buyer to hold off on making this kind of investment, even in the midst of the "please remain calm" media campaign being run by the biggest names in the real estate business. Think about how many more people will sit on the sidelines, not buying at ANY price, until the cost of buying is somewhere close to renting. Because that's the benchmark the economists are going to end up pushing in answer to the question of "when should I buy?"

When the pricing trend reaches that critical mass, it won't matter how badly a seller wants to sell because their buyers won't pull the trigger until the prices recede. Because a seller basically can't sell for much less than the current balance on their mortgages, those sellers who are maxed will end up being trapped in their homes until they either default or the market comes back around in the next cycle. Or perhaps I should say, IF it comes back to this point in the next cycle.

I've been in the appraisal business for 20+ years now and this is the first time I've ever even heard of people seriously considering selling in favor of renting. Yesterday, I spoke with a friend of mine who retired after 45 years in the appraisal business and he said he'd never heard of it either. The current attitude going around about questioning the true value of "ownership at any price" is as unprecedented as the price spike that has contributed to it. I don't think it is being too unrealistic or too negative to extrapolate an increase in the number of people who will eventually come to hold that attitude as it gets more media play. Social acceptability of renting could possibly end up having a huge impact on the market psychology, which in turn could have an impact on how well the "buy now or get priced out" marketing ploy works in the future.

What will be the impact on rental prices?

The Q is: Will sellers leave CA, or move into a rental?

I think there's a difference between a homeowner thinking about renting and cashing out to actually do it. But if a lot of owners did move out to rent it would probably lead to an increase in SFR rents. Let's face it, when compared to paying $1,400/month to rent a 2bd apartment in a nice project, paying less then $2,000/month for a detached home in a comparable neighborhood is indicative of an SFR rental market that's somewhat undervalued when looking at the relative utility of these different property types. Those SFR rents probably SHOULD come up a couple hundred bucks. At least.

Just thinking out loud here... Let’s limit the analysis to SFR rentals.

If people cash out in favor of renting, who's buying their house? Is it someone currently renting? If so, then the demand for rentals does not increase, it's just a swap. Although, I could be convinced that few people currently renting a SFR are likely to be buying any time soon.

Let's consider population flux: I'd guess that if we start to see significant housing price declines, very few people coming to town who would normally buy, will do so. So this is an argument for an increase in demand for rentals. However, some portion of the people leaving town will be owners and have to make the choice of either; a) selling in an unfavorable market possibly under distress; b) Grit their teeth, hang on to the property waiting for the cycle to come back... and of course rent out that property. So, at least some will choose option b thus putting more SFR inventory on the market for rent. This could have a balancing effect on supply/demand. It really depends on the flux rate. I bet there will not be as many people coming to town as leaving.

If the psychological effects of the loss of all that paper wealth cause people to spend less, resulting in a real impact on the local economy, people will become much more cost conscience and this could put downward pressure on the SFR rental market. (Wow, that was a long sentence… Sorry to the grammar police out there…)

I think I can convince myself that the SFR rental market could stay flat or decline. Knowing what happened in the last downturn would be interesting. Is there any historical record of rental prices out there?

I don't know of any historical records. All I can do is tell you that SFR rents never did go down - they just stayed where they were and didn't go up. Matter of fact, rents didn't increase at all until the sale prices moved out of the low side of the cycle and passed the historical trendline itself. Since 1990 the rent amounts have increased an average of about 50%; which is not unreasonable when compared to housing prices and when considering the effects of inflation on the dollar.

I bet there will not be as many people coming to town as leaving.

A quick hop over to U Haul's website for quotes on one-way rentals will tell you all you need to know.

17' truck (SD to LV): $405
17' truck (LV to SD): $159

I love the u-haul test! Similar % spread for various locations? Or is LV an anomoly?

I love this:

"friends don't let friends buy SD Real Estate"

I'll use it often and pretend I made it up myself ;-)

> "If people cash out in favor of renting, who's buying their house?"

The bank.

dude, banks don't buy houses.

Same 17' truck from Phoenix to SD: $99.
SD to Phoenix: $319.

I'd guess you'd see similar lopsidedness just about anywhere you'd check.

We just moved back here to SD,last lived here in 10/02. It was our thought that we'd buy a place, really don't like renting, but very scared of buying in this market.
Also looking at listings, doesn't seem as if sellers are reducing their prices very fast. When we sold here our realtor was always after us to reduce the price, the argument (at that time) being that after 30 days with no price reduction you aren't going to get any viewings.
Now I'm seeing 100+ days and no reduction, what's with that?

Realtors are telling their sellers to reduce, but sellers are digging in their heels. To them, paper profits are real profits that they would be losing by lowering the price. Sellers are spoiled by rapid appreciation of recent years. The whole psychology element of investing is fascinating!

They do if people can't make the payment.

Speaking of reductions. Did anyone see the article in the Daily Business Report whereby Lennar and Larry Clemens have parted ways as part of a downsizing move?

That's huge. Clemens is a giant in the homebuilding industry here in San Diego and for Lennar to let him go (or for him to leave) is in my opinion, a look into the future of what's coming down the road for the entire homebuilding industry. The word on the street is a lot of builders are rethinking future acquisitions and are keeping only the prime deals, letting the others go.

See the article below:

Daily Business Report

April 21, 2006

DOWNTOWN

Larry Clemens, who headed the San Diego urban division of home builder Lennar Corp., has left the company. Clemens’ departure followed an announcement earlier this month that Lennar was consolidating its Southern California divisions. A published report said the Downtown office of Lennar would lose about one third of its staff, which numbered 25.

Bernie Rhinerson, a spokesman for Lennar, said yesterday (April 20) that he did not know how many people are left in the Downtown office. He said John Spelke, a staff member there, is now managing the office.

Rhinerson said the consolidation will have no affect on the projects that Lennar is currently involved with in San Diego. One of those is the seven-acre, $1.4 billion Ballpark Village residential, office and retail complex that it is developing in partnership with John Moores’ JMI Realty in East Village. Lennar also is partnering with Intergulf Development Group on Breeza, a 158-unit condominium development under construction at the northeast corner of Pacific Highway and Ash Street. Unclear is whether Lennar will continue negotiating the purchase of other properties in East Village for future developments. Rhinerson, however, said the company "is still looking for new opportunities."

Clemens, one of 25 persons profiled by Metropolitan Magazine last December as "Metro Movers to Watch in 06," supervised the move of Lennar San Diego Urban Development Group from Carlsbad to Downtown. Clemens is on vacation this week

17-foot U-Haul truck:

Colorado Springs to San Diego - $599
San Diego to Colorado Springs - $1266

So U-Haul has so few trucks in San Diego, that they give you a 50% discount for driving a truck there. They badly need the trucks in San Diego, for all the people in the exodus out of San Diego. I bet you would find similar stats for leaving anywhere in CA, FL, NY, etc. Has anyone looked over the UHaul site more, to see which cities/states have the highest exodues?

We could use the UHaul data as a leading indicator, where the Census Bureau lags by about 5 years.

BTW, I'm getting really excited about leading indicators. The book, Ahead of the Curve, is about that topic. Written by a Goldman Sachs economist, with 18 years in the retail sector, he writes about the cause-effect relationships of various data, and where economists make the mistakes. For example, they think that employment is a leading indicator of job growth, where in reality it is a 9-12 month lagging indicator. The leading indicator is consumer spending. I'm sure we can improve his model by adding MEW and the U-Haul data.

No. They get the deed in a foreclosure and then sell the house. Anyway, no need to get anal... The point was that people are cashing out of their houses to rent (like several of us have done on this site.) We're not talking about foreclosure.