San Diego Housing Bubble News and Analysis

A lot of people are moving into those condo conversions that were previously renting so I'm not sure how big an effect the conversions are having on rental supply. I rent a fairly nice 4br 3 bath house in PB for $1950/mo. The mortgage if you bought it today would probably be closer to 4-5k a month.

I've been watching the rental market as much as the sales market for the last 2 years, because I want to move, but don't want to buy if we're at the top of the market, but don't want to rent for just 6 months somewhere only to find I should buy if the market drops enough.

I would say the rentals have been going way up for at least 2 years! I have been amazed at what owners are asking and getting in rents! I have to assume it's only going to get worse: as more people keep moving here, and as foreclosures go up and people become renters again, it seems like that will just drive up the rental market too. If I'm wrong, someone please let me know.

I can't comment on whether rents are going up, but can say that rents are about 1/3 the cost of an equivalent mortgage in Poway.
We rented a $950,000 house in a nice Poway neighborhood, while we were building a house, and paid $2500/month. The landlord had just purchased the house as a rental (investment) property, and her mortgage should have been about 3x that amount.
Now we are selling our newly constructed home, and are again looking at rentals in Poway, and am surprised that most houses rent for $1650 - $2250.
We are taking out the equity, and renting for the next 5 years until the market corrects. I think the bubble forecasters are conservative in expecting a 20% - 30% correction, because in any excess, the pendulum first swings the other way before it normalizes. A correction of 40% - 50% is more likely, and if you follow the trendline of median house price/per capita income, and the trendline for housing prices following inflation, you will get to about a 50% correction. It may take 4 - 5 years to get there.

I rent a 2000sf place (built in 2001) with 2 car garage, fireplace, wood floors, granite countertops, nice appliances, etc... in downtown SD for $2395/mo. The management company tried unsuccessfully to rent it for $2700, $2600, and $2500/mo before I moved in.

Just go to Craigs list:
http://sandiego.craigslist.org/apa/

The number of houses available for rent is staggering...and insanely cheap compared to purchasing. Its totally absurd why anyone would buy instead of rent at this price disparity.

Gspan got stock market bubble for us, then housing bubble. Only 15% of the people in southern CA can afford the house now. If rent continues to go up and renters can not afford, where shall people live?
Where is this government leading us to? Ya, Southern has a great climate. We can all camp outside, I guess.

Such an interesting relationship between rents and house prices. In Sacramento, apartments/small homes have been moving up while bigger properties have been flat. It seems that those who cannot afford to buy anything will be forced into higher rents, but it is a rare tenant who can afford to buy but is chosing to pay $2,000/month instead.

I have a very nice 4-bedroom house with 3-car garage for $1,500/month (allegedly "worth" $600k now), but you wouldn't believe the lousy stuff we were shown at the tenant-competitive $1,200 level. We got three times the quality for that extra $300.

Rents in UTC for apartment communities are being squeezed upward because of the overabundance of condo conversion inventory vs. available apartments. Several major complexes are competing against each other within just a few blocks of each other. I've heard that rents in the area have jumped $100 in many places as the management companies have taken advantage of the situation. A friend there has had rent in a less than great complex jump by more than $200/mo!

I checked the rental vacancy rate for SD a few weeks ago and it was nearly 5%. The last big rent jump in the area was about $100 in 1998 when the vacancy rate was under 2%. Go figure.

Does this support the view that more people are comming to SD?

Personally I think this is temperary situation cause by the rental housing shortage created by condo-conversions. It takes a while to convert an apartment complex into "new homes".

Also it reflects the quality of the tenants. Most good tenants have become homeowners by now. So they have to rent it to less qualified renters and so they have to price in more risk premiums.

Does anybody know how long does it take to refurbish a building for conversion? My guess is about half a year. First you have to do the exterior and then interior of each units.

Condo conversions can last anywhere from 9-24 months, or longer, depending on how fast the paperwork gets approved. On those bigger developments, I'd guess it's at least 2 years.

There was a condo conversion near my home and I almost bought it. When they first change the owner and opened the door, they are already approved for the conversion, so all the paperwork has been done. They were selling for 6 month advance. They need to get the renters out for the interior since they did not do any work on the exterior (maybe just a fresh new paint.)

Believe it or not, there are a lot of "good tenants" out there who have not become homeowners "by now". Lest ye not forget--the median household income in San Diego is NOT amongst the highest in the Nation. Additionally, there are an ever growing number of people unwilling to pay what it would take to buy "condos" (apartments really) at current prices. Finally...higher rents are not due to "risk premiums"...rather over-leveraged speculators who are BARELY staying above water to own said "condos" trying to raise rents. Dead ducks they are!! Every single one of them!! Remember---"DENIAL IS NOT JUST A HOUSING BUBBLE IN SAN DIEGO"

Too true.
There are still good renters out there who realize that the price of renting in SD is less than half of owning right now. The rent prices that I have seen the would-be landlords trying to charge for their redecorated condo-apartments to try to cover their mortgages are nothing short of silly sometimes.

The people who I know that are renting in the area choose not to buy. The stories I hear of those buying the units are speculative.

Rents are lower now. It seems that anyone with a pulse has qualified to purchase a home, and rentals are staying on the market a long time, driving the prices down.
I am speaking of my experience over the last 45 days looking for a rental home in Poway and Rancho Bernardo.

This week I read a study going back over 30 years in SD, and the rents were usually $1.15/sq ft in North Cty Inland. Currently, these are $1/sq ft, sometimes a little more if the lot is really big or it's an exclusive neighborhood. Some owners are asking more, but their rentals are still vacant. We will be paying $1/sq ft for a 2000 sq ft nice duplex built in 2003. During my search I witnessed reductions on rental prices, and find that a 2900 sq ft brand new house is still vacant after 105 days on market (MLS listing for rent), despite coming down from $3200/month to $2600/month. We almost took it, but decided to cut our costs a little while renting.
I get a kick out of asking the owners why they are renting and not selling. They are all speculating that prices will go up.

Our recent experience tells me that rents are certainly not going up. We recently sold our house in Escondido and needed to find a rental house in the Escondido-San Marcos area. We found that we were in a position to negotiate down the rent in almost every case.

I should add that the most amazing thing about the process was that every house we looked at, the owner would be cash-flow negative on a monthly basis, some severely negative.

I witnessed several situations where the owners / speculators are - in all likelihood - going to get creamed.

If anyone's interested in the sordid details, I'll post additional information.

Jim - please share your sordid details. I found the same thing - I could negotiate on every rental, and some owners are definitely cash flow negative.

cowboy - I know some asking rent prices are up, but what are actual rent contracts? I noticed the same listings for many weeks, even over 100 days, because the owner was asking too much. I see a lot of high rental ads, but they are still listed, those same ones. Presumably they are trying to cover their mortgage and/or equity line, but then the place just sits vacant. In Poway and Rancho Bernardo, houses go for about $1/sq ft., and I negotiated on several places and was able to bring down the price on three of them.

hi,powayseller,

It seems you are pretty familiar with Northern SD market.

We are first time home buyer. Just made an offer in Nov., but somebody grabbed the deal. Today I saw the same house is on the market again after 1.5 month. The buyer obviously is a flip flopper. He bought the house for about 497k in Nov,(the seller had to sell because of job changing, so he lowered the price from 519k--539k to 499k.) now this flip flopper is asking for 539k--569k.
It is sad to see those flip flopper manipulate the market.
We decide to continue to rent, and wait and see. Do you have some idea about Scripp ranch area rental situation? Do I have to go through agent to rent a house?
Thank you in advance.

Keep renting until prices stop going down. I checked for rentals online, through the San Diego Union Tribune (you can search by area), craigslist.org, backpage.com, and then the MLS. For the MLS, you need to ask a realtor to get you a link, and then everytime the MLS updates, you get an automatic e-mail update. The MLS shows you the time on market, but for the others you will notice how long you see the same ad. Always ask for a lower price, and if they charge more than $1/sq ft, they are overpriced and no one will want it until they reduce the price. Some novice investors ask for high rent prices to cover the mortgage, but seasoned investors expect to be cash flow negative, so they price theirs at market rate. You have good karma to have lost the house in November. Keep an eye on the house, and keep us posted - my guess is it will sit on market until the flip flopper lowers it to $450K. Prices are declining, not rising, and homes priced too high just sit until the prices are lowered.

The worst case we ran into was a speculator from New York. We were given his number by the contact from Craig's List. Before speaking with him, I checked the particulars on the house from publicly available stuff at the county website (selling price, property taxes, etc.). He paid $647k in October 04. His asking price for rent was $2,200.

He was trying to rent out a one-year-old house in the new Hidden Trails subdivision of Escondido. He wanted to rent it out on a month-to-month while also listing it for sale (asking price of $760-790k; I should add that there appeared to be no improvements to the house other than those put in by the developer). I told him we weren't interested in that arrangement. I also told him he needed to lower his selling price if he wanted to sell the property. His response: "I can't. If I do, I won't make a profit."

He called a half hour later and suggested that we see the house. We did check it out and it was very nice (3,100 sf on a big lot; decent amenities). I called him back and told him we liked it but we still couldn't rent a house while it was being sold. He offered to take it off the market for 6 months for us but he would also raise the rent $200/month. He also disclosed that his monthly nut on the place was ~$3,900. I took him at his word.

We ended up renting another place and when I spoke with him, he had a lot of questions about the market. I told him it had softened with the October YOY median resale price in the county only up about 2%. I also suggested that he take a trip out to San Diego so he could drive around north county and witness the amount of new home construction that was occurring. He mumbled something about holding out for the "miracle offer".

A week or two later, I noted that he had dropped his asking price by $10k. Not enough IMO. The listing has since disappeared. I haven't seen a sale show up yet on the county web site so I assume he found a renter.

How many others are out there like this guy?

A housing unit is a housing unit is a housing unit. When an upscale home is built in Carmel Valley an average of four households will improve their housing situation. The Carmel Valley home may be purchased by someone from Tierrasanta whose home may be purchased by a someone from Clairemont. That home may be purchased by a tenant Mission Valley.

The point of this is Condo Conversions will have no long term impacts on vacancies. When an apartment building is converted to condos, those units are not occupied by Martians. They are typically occupied by apartment dwellers who move in and free up an apartment unit. Yes conversions create a lot of inconvenience for those whose units are converted but it does not create a housing shortage.

I operate 165 apartment units in the North Park University Hts and Normal Hts area. Over the last several years, I have lost many excellent residents who have purchased condo coversions.

In my experience that trend has stabilized and I don't see that many of my residents moving to purchase their own place.

Vacancies today are noticeably lower than a year ago and obtainable rents are up about 2%. To me obtainable rent is the price at which I would rent a vacant unit.

I do believe that conversions decrease vacancies in the short term. When apartments are coverted there is a period of some months between the time that an apartment tenant vacates and a condo buyer moves in. Considering the number of units in process I would think that number is significant for any given neighborhood. I would love to hear from anyone who can put numbers on how much neighborhood vacancies are impacted.

Norman Hamlin
nhamlin [at] pacbell [dot] net

Thank you for the information, powayseller.

I will keep my eye on that flip flopper's house. My guess is he(she) is testing the market. I don't think he(she) can sell at that price right now because on the same street there is a better designed, bigger condo for sale for 509k--539k, unless this market will go crazy again in Spring and interest rate won't go up which I doubt.
Thanks again.
Happy New Year!

Market conditions (realtytime.com)

I just saw this article from "realtytime.com". It seems they are trying to scare the renters.

Market Conditions
by Carla L. Davis

The new year is upon us. What should buyers and seller expect from their local real estate market?

Realty Times takes a look at areas across the nation in today's report.

The National Association of Home Builders released a report on December 21st that highlighted how, while the economy of 2006 appears to be set for decent growth patterns, the real estate market is expected to return to numbers that are similar to that of 2004. That means no bubble burst -- but a normalizing of the market.

"It's pretty obvious at this point that the real estate market is gradually shifting to more of a buyer's market," said James Glassman, JP Morgan Chase Senior Economist. "This has been a case of real estate prices catching up to market fundamentals – not a 'bubble.'" With this in mind, "It's reasonable to assume that house-price appreciation will be slowing down to the single digits."

A normalizing market is, however, cause for concern for some sellers. This means that their home, which could have netted them 15 to 20 percent profits (for example) in 2005, might only sell for 10 to 15 percent profits. The numbers vary greatly by area -- being affected by local economies, government policies and laws, and a multitude of other factors.

Off of the western coast, Hawaii has seen enormous returns for investors of the last five years.

Our real estate experts report that the Maui real estate market, booming in 2003 and 2004, has showed some recent slowing. Condominium and land unit sales Island-wide for the year through only October had already declined by anywhere from 11 to 15 percent. This slowing in unit transactions, however, was offset by increases in average sales price. These figures are still what some would consider outstanding. Home prices increased 27 percent this year. Condominiums increased by 18 percent. And coming in at the lead, land prices rose 42 percent. These trends are not expected to continue.

Looking to the south, the NAHB notes that manufactured or "HUD-code" homes might see a temporary surge in activity, due to need for affordable housing in areas hit by this summer's hurricanes.

In San Antonio, Texas, inventories are high, meaning finding a home to buy is easier than in some locations of the country. New homes can be purchased in the low to mid $100,000s. The average current home sales price is $137,971 for last year.

One expert writes a warning for renters, however, saying, "One should note that due to a large influx of investors we are starting to see more days on market for rentals. There are currently 1399 homes available for lease, average days on market is 63, and the average asking rent is 1282 dollars. This is an increase of $239 a month in rent and 7 days more on the market."

Published: January 2, 2006

Here's an update on the New York speculator. The house is back on the market as a "new" listing. Here's a progression of his asking prices since I first encountered him in October.

First asking price: $759-789k
After I spoke with him: $749-789k
New asking price: $725-775k

Still too high IMO. Outside the increasingly unlikely "miracle offer" he mentioned, I don't think he'll even get a nibble until he's below $700k.

If anyone's interested, the MLS # is 066002128.

I rent a condo near UTC mall and my rent will be raised 3% soon (end of year lease). I'm seeing a settling point for 2BR/2BA condo rentals here at $1650-$1750.

As for the "more people coming into SD" theory, please keep in mind that Biogen-Idec just laid off a bunch of people in the Biotech sector, and no new BIG tech/biotech starts are happening. All the job growth for the past 3-4 years has been related to real estate.

- ricechek

rent up?
Anybody knows what was the rental situation in scripps ranch? I recently checked their price and it seems the average asking price is pretty high, for around 1200sqt, they are asking for $1650, most of them are above $2000(don't know the size.) Is this too high?

Rental prices are about $1/sq ft around Poway and Rancho Bernardo, with a base price of at least $1700 for a house. So a 1500 sq ft house could cost $1700, but after 2000 sq ft, they're about $1/sq ft. You might find a little higher for a brand new house or a huge lot, about $1.10/sq ft. The owners who are asking more, are not getting it - those are vacant. Next time you see a rental priced over $1.10/sq ft, ask how long it has been on the market, and check what the landlord got when he/she finally found a tenant.

On my street, another rental has been available for over 3 months. It is 2000 sq ft, and they are asking $2350 (down from $2650). It is still vacant.

Asking price doesn't mean much. Landlords, who bought on hopes of appreciation, are trying to get what they can. Experienced landlords ask for competitive market rates, such as I quoted you above.

Thanks for your information, powayseller.
Seems rent is definitely higher in scripps ranch. for around 1200sqt, they are asking for more than $1600. Especially those near miramar lake, they are all asking for more than $2000. Maybe those investors are all in negative cash flow,so they have to ask for higher price to cover that.

If it is not for my daughter's school, there is no way i would rent it there.(She needs to be in CA GATE(gifted and talented education) seminar program, which only Miramar Ranch Elementary school provides in this area. They told me if you are the resident in scripps ranch, you have more advantage to get into the program.)

This is a re-post of something I found on Ben's blog.
I believe that it's a sign of what's to come in San Diego. Remember all the free rents of the 1990s? They'll be back.

Owners right now are still in denial. So it'll take time.

-------------------------

The Providence Journal from Rhode Island. “One classified newspaper ad says ‘1st Mo. FREE.’ Another: ‘Free Heat, Free Hot Water and FREE RENT!’”

“The latest ‘promotional giveaways’ to lure new tenants even include a free spa getaway weekend. If that’s not enough, one property manager offers $500 to anyone who makes a referral that lands a new tenant.”

“The reason is simple: rental properties are going empty. ‘Our occupancy rates are off anywhere from 2 to 5 percent’ from last year, said Cheryl Martin, VP of Residential Property Management of Warwick. ‘We need to do something to be more aggressive in order to compete.’”

“Property managers and real-estate agents say the demand for rentals priced at $1,100 per month and up has gone soft. Not since the recessional mid-1990s, Martin said, have they resorted to freebies to lure new tenants.”

“The large number of rentals going empty is reflected statewide in the ‘rental vacancy rate,’ which has nearly doubled in the last three years, to 7.7 percent last year, according to U.S. Census data.”

“‘We’re flooded with inventory,’ said Diane Barone, a real-estate agent in Cranston. ‘The rental market is terrible; it’s just terrible. You get a bunch of people and you show, you show, you show, and they’re just sitting there.’”

“The construction of hundreds of condos, many in downtown Providence, has also flooded the real-estate market, and some of the spillover is driving up the inventory of rentals as condo owners who can’t sell their units decide instead to rent them out.”

“‘I have a client right now, he’s got a little house on Ninth Street for $1,600 a month, and he’s down to $1,300 and nobody even wants to look at it,’ said Suzanne Knight, a real-estate agent on Providence’s East Side. ‘It’s been vacant for four months now. … There’s just much more supply than demand.’”

“East Side property owners are competing with new downtown properties, Knight said. ‘There are hundreds of rental units downtown that weren’t here two years ago,’ Knight said. ‘You’d think landlords would lower their rents, but it takes a while. So they’re empty.’”

i'm in temecula, renting a 2005 house...lots of upgrades, nice private backyard, nicely landscaped...super clean...it looks like it was bought new and put up for sale/rent..never lived in. lot is small...but for a rental house it's great. 1900 sq ft.

$1400/month. :)

I've seen large "executive" homes in the Temecula/Murrieta area going for $2000-2400/month. these are super fixed up, 3000+ sq ft, all the bells whistles, probably a pool...etc... more space than the normal family reallyneeds.

you could almost move your inlaws in...and have them kick in for the rent given how big some of these houses are...which I kind of think is what is happening in some of these areas.. 4 car garages..."suites" upstairs and down..it's like the builders KNOW that 2 familes are chipping in to make the payment...

anyway..rent up here in Temecula is great. you can get a lot for your money. i'm just watching the prices go down.
the hosue I amr enting was up for sale at $550k six monthsa go. the other day the owner offered to selli t to me for $440k.

100k price drop in 6 months.. talk about overpriced...