San Diego Housing Market News and Analysis

I'm breaking radio silence, finally, after having sequestered myself for a week and a half to cram for a securities licensing exam. (The exam manual suggested studying for 4-6 weeks vs. my 1.5 weeks, hence the cramming). Anyway, said exam was successfully passed yesterday, so I can close the door on that particularly onerous 10-day period of my life and get back to writing occasional content for this site.

I did check the forums from time to time during my absence, and now that I have a minute I wanted to revisit a really interesting article someone posted. The USA Today article, entitled "Buyers in more markets find housing out of reach," chronicles the plight of a San Diego postdoc who bought a home with 100% financing, whose PITI eats up 70% of her take home pay, and who has among other things taken to selling her fertile eggs in order to make the mortgage payments.

I just came across this blurb from George Soros' latest book:

I believe we are currently in the midst of a gigantic real estate bubble. It was caused by the determination of the Federal Reserve Bank not to allow a stock market decline in 2001 to turn into a self-reinforcing rout. The federal funds rate was lowered to 1 percent. Mortgage institutions encouraged mortgage holders to refinance their mortgages and withdraw the excess equity. They lowered their lending standards and introduced new products such as adjustable rate mortgages (ARMs), “interest only” mortgages, and promotional “teaser rates.” All this encouraged speculation in residential housing units. House prices started to rise at double-digit rates. This served to reinforce speculation, and the rise in house prices made the owners feel rich; the result was a consumption boom that has sustained the economy in recent years. Again, the bubble can be attributed to a short-circuit between the value of assets and the act of valuation. This short-circuit is called the wealth effect.

Nothing qualitatively new nor surprising to readers of this site; it's just always nice to have one of the world's most successful financial market players land on our side of the debate.

Low rates have been one of the mainstays of the bullish arsenal. But given that mortgage rates are where they were four years ago, then they shouldn't be a factor in explaining any price difference that has taken place during that time period.

So if we take rates out of the picture, we are left with population, housing stock, inflation, and incomes: all factors that would affect both rents and home prices. Which is to say, if rates are the same now as they were four years ago, why should home prices have risen so much more than rents during that time?

As if on cue (given the housing market report's discussion of an imminent shift in sentiment), the Union-Tribune has released an article with the gloomy title "San Diego County home prices take a tumble."

I believe we'll be seeing a lot more headlines like this in the future...

The party is officially over. This is no great surprise, and we've seen it coming for months. But what's different now is that there is no longer any question that the home price downturn has begun.

At the beginning of 2005, we were in a situation where prices had been flat since the summer, inventory had risen substantially, and sales volume was down. Things didn't look terribly promising for the market. But rates remained fairly low, and lenders tried to drive more volume by pushing non-traditional mortgage products that lowered initial monthly payments. The resulting bump in demand fed a little spring rally, and the spring of 2005 actually saw a bit of a rise in median home prices.

Last week featured a couple of interesting housing articles in the local press.

At voiceofsandiego.org, Will Carless has dug up some really compelling info for an article on mortgage resets. Specifically, an estimated 50% of all San Diego mortgage debt has been borrowed at an adjustable rate that will reset by 2010. If rates don't stay nice and low over the next four years all these resets will make a bad situation worse. (This is another clue that the 2010-2011 timeframe might be a good time to start buying San Diego homes hand over fist).

(Click here for an audio version of this article).

The upward surge in mortgage rates has continued, and as of now both fixed and adjustable mortgage rates are sitting atop their multi-year highs:

Tomorrow's voiceofsandiego.org column, a link to which will be available on the upper right of the page*, concerns the shortcomings of the median price as a gauge of broad pricing power.

The executive summary is that the median price does a good job of measuring how much people are willing to spend on housing, but there is a margin of error in translating that to changes in the market price of a given property. Depending on the dynamics involved, this error can go either way: the median price overstated price growth until 2003, after which time it began to understate actual price growth. As has been discussed in the forums, we seem to be getting back to a situation where median prices are once again overstating housing market pricing power.

Update - May 30 - It looks like the resource usage issues are still occurring. The site may go down from time to time in the near future until I can work with my ISP to figure this out... please bear with me. The original message follows.

Upgrades to the Site

We had to shut down last week because the site was putting tremendous load on my ISP's server. Because there was no concomitant spike in traffic, I believe the excess load was either due to a denial-of-service attack or some sort of memory leak or other bug with the content management software I use. The ISP applied all security patches on their end and it kept happening, so the only thing left to do was to upgrade to the latest and greatest version of the content management software and see if that fixes the problem, be it security- or performance-related.

Check out The Big Picture for a good take on why the "it's ok because interest rates are low" gambit is so ridiculous. In short, it is because it is the directional change in rates from the time you buy the asset, and not the actual level of rates at which you buy the asset, that matters:

To risk assets, the cost of capital is like the wind. It is the change from the start of the race that matters, the more headwind the more trouble, and the more wind one can summon to their back, the faster the ship sails.

Who spiked the water cooler at the Union-Tribune office? Or, maybe, who stopped spiking it?

Ah, I kid because I love. But seriously, their latest piece on the sharp rise in mortgage defaults is unusually somber. And it has some cool graphs.

Señor Risk has published an interesting chart showing that Californians' rush into real estate as a career is still going strong. There is still optimisim aplenty out there.

Will Carless at voiceofsandiego.org wrote a piece yesterday on San Diego's rising foreclosure rate. That's certainly an ominous sign, as a surge of "must-sell" inventory is the most likely catalyst to drive prices substantially lower at some point. But foreclosures are rising off their "everyone has a huge equity cushion"-lows and are still fairly contained, from a historical perspective. So while the directional growth trend is bad news, the amount of foreclosures is not as of yet a big problem.

The market is starting to give us a more conclusive view of what's to come. This month's report will check in on the widely-expected spring rally and will use the resulting conclusions to forecast where things may go from here.

I found an interesting tidbit on the Housing Bubble Blog. A researcher looking at historical California inventory levels found that once the supply of homes hits 9 months worth of sales, median prices fall "on a consistent basis." This is a statewide stat, but it at least gives us some general insight as to the location of that line in the sand past which increased inventory starts to push prices south.

In regard to price declines, what's more important than the overall inventory level is the amount of "distressed" inventory supplied by owners who have to sell at whatever price they can get. But those two numbers tend to trend up and down together.

As I will discuss more in the monthly housing report (which is coming very soon, and will include new data sources to provide a more current read on the market than is supplied by DataQuick) the combined condo and SFR inventory in San Diego is currently a little below 8 months.