I am not a football fan. However, I think a football metaphor is in order.
Regardless of which of these opposing teams a person finds themself, it would be foolish to declare the winner of this game before it ends. That is, until this economic cycle completes and starts over again. If we attribute the peak of the market as representing the end of the 2nd quarter of the game, that would mean that we are currently in the beginning of the 3rd quarter. We are a long ways off from the end of this game.
Now it could be that the 2nd half of this game will go a lot faster than the 1st half; that’s what our soft landing crowd thinks will happen. It’s also possible that the 2nd half could last just as long as the first half; that’s what our Revert-to-Mean adherents think will happen.
We already know that the uber-bulls who were pumping the New Paradigm were flat-out wrong because the market has already gone where they said it wouldn’t go. So the RtM crowd already has a partial victory. Many of the people who did purchase in the last 24 months have already seen their “profits” evaporate, whether they have to sell right now or not. So much for how smart they were.
As for rents, there are a couple things we need to never forget about rents. For one, renters have no long term upside; that is, they have no expectation of profits from appreciation. That means they approach housing costs as being solely about housing, not about retirement or moving up the property ladder or impressing their buddies at work with their financial acumen.
Secondly, rents are tied to solely to wages, not investment income. San Diego wages are increasing only slowly and unevenly, and there is no reason to think they will double or triple in the next 10 years. In fact, in a global economy they CAN’T double or triple in the next 10 years.
That’s why there is only so much room for rents to increase. Unlike a short-horizon investor, a renter has no incentive to spend 50% or more of their income on their housing because they do have options. One of those options is to leave town – we know this because that’s what has been happening here in town for a couple years now. Some of the people leaving town were homeowners and others were people who wanted to be homeowners.
So the bottom line on rents is that will not double or triple in the next 5 years and they will not support the current prices less losses at the soft-landing level.
Now if you have something other that “this is SD and everyone wants to be here” we’d love to listen. But if you want to influence our opinions you’re going to have to back that something up. So far, NOBODY has brought anything in that will stand up to even casual examination.