Let’s think this through from the supply and demand sides.
Supply: Currently, a large number of SFH are for rent because owners are banking on appreciation. Owner moved and kept house (either as investment or to move back to SD some day), owner moved up to larger home and is renting the former home, owner made investment. Most SFH rentals are the last category. These homes were purchased in the last 3 years, and financed with money from the owner’s other investment properties or primary residence. The glut of these homes has depressed rental prices somewhat.
The owners may be cash-flow negative, but obviously can afford to hang on, or they would have sold by now. If the market turns, these owners, will either get cold feet and cash out, or ride it out.
Any owners with an ARM, may not be able to ride it out. Once the payment adjusts up, they may be forced to sell. Let’s assume 1/3 of SFH rentals will go on the market by 2007, because owners are worried about price drops, or they cannot afford the mortgages any longer.
DEMAND: Demand won’t come from new families to the area, because as we already know, SD has a net loss of people (except illegals). Rental demand comes from people who lose their homes to foreclosure. Two categories come to mind: people who lost their RE related income (realtors, title officers, carpet installers, Home Depot salesperson, appraiser, granite fabricator, plumber). When they lose their job, they will leave San Diego for a cheaper area of the country, or one where construction is still going. Perhaps Texas? Then there are those losing jobs because MEW slows down: retail, restaurants.
The second category of foreclosures is people whose mortgages adjust. They still have their jobs, and will stay in San Diego. Most of those folks just will not have the $5K they need to put a deposit and 1st month’s rent on a house. If you had the $5K to put down a deposit and 1st month’s rent, you wouldn’t be in foreclosure. So how can that group possibly get into a house? Or even an apartment? Do any realtors know what happens to people in foreclosure?
Summary: Supply will go down at the same time that demand goes down. I have no clue which goes down more, and thus, where the price balances out.
