Relative Value of So Cal RE

[gs]

I agree that prices have gotten ahead of themselves. Last year, I sold my home of 13 years and am now renting, waiting for a good re-entry point. However, I’m not sure we will ever get back to the historical affordability metrics noted on this website. Southern California used to be a place with abundant and affordable land suitable for orange groves, large movie studios, and aerospace manufacturing plants. Every year, however, LA feels more and more like New York City and all the forecasts I have seen project further population growth due to immigration and birthrate. Given the changing nature of Southern California, I think you have to look at all the valuation metrics relative to other large cities, including the most expensive ones (New York, London, Hong Kong, and Paris). I suspect that Southern California would look much more attractive on a price/square foot, rent/sq ft., land/sq ft, affordability, etc when you include these cities in the comparison. Also, the public REITs are reporting very strong rent growth. Several years of 7% annualized rent growth would bring the price to rent ratio down substantially without a lower numerator (price).

[KingKong]

Hi gs,

I totally agree with you. 10 years ago, San Diego was a vacation destination with no traffic and smog. Now San Diego is a high tech hub with defense, wireless and pharmaceutical research and drug development. Daily commute is a struggle for everyone and you do not need to go to LA to see smogs.

IMHO, the price will drop (we already see a 10% drop) a little further. But I just can’t see a drop more than 30%. I also do not think it will be a quick recovery. I see at least 5 years to get back to the peak in dollar amount.

Just my 2 cents.

Back to my jungles 🙂

[Daniel]

I think you have a very good point. If long-term interest rates stay low (that’s a big macroeconomic if, I know), and rent inflation continues to be high, then equilibrium home prices could be substantially higher than in the past. Actually, this issue has been discussed at length on some threads a few months back. Look for a thread called “Reversion to the mean” by PS, and another thread (don’t remember the name) that prompted PS to start “Reversion to the mean”. Needless to say, there was no consensus on this rather tricky issue. My point of view is probably close to yours (we’re overpriced today, but won’t go down to price/income of 8 anytime soon, if ever).

[Bugs]

The “Glamor City” argument has been put forth more than once, and I wouldn’t necessarily discount it as a whole. However, what exactly is it we’re saying when we say that people will always pay a lot more to live here? That’s basically saying that the demand outstrips the supply and that scarcity and competition between buyers is driving the prices. Meanwhile, we have net outmigration as people leave town, and they’re doing this at the same time that we have an ultra-high standing inventory of listings, with more in the pipeline. Some people may perceive there to be some scarcity but these wage/population trends appear to be demonstrating otherwise.

A true glamor city holds its ranking (if not its pricing) no matter what. How do they do that? Well, there are only so many ways to pay for that expensive housing. One way is to grow their buyers for these price ranges in the local economy. Jobs, businesses and wages. San Diego has done some of that, but only at a small fraction of what it would take to service the types of increases that have occurred. New York and San Francicso have much stronger employment situations to support their price levels.

The other way is to import your buyers, who have made their money elsewhere and are looking for their destination. No doubt some of the money used for housing purchases in the last few years has been money earned or inherited from outside the local economy. Again, it doesn’t look like the number of imports coming in would even be equal to the numbers that are leaving.

These prices will seek their own equilibrium, and maybe that equilibrium won’t be as low as the long term trendline. Maybe the average buyer will buy into the notion that in order to live in this “paradise” it’s worth it to them to spend 50%+ of their annual income. Even though they can buy the same house in Riverside County for about 35% less. Even though they can rent the same house in San Diego County for 50% less.

I do know that two of the main “fundamentals” driving the runup were speculation and fear, and that the departure from the market of those buyers have already been big factors in our recent declines. Glamor may be in there somewhere, too; but the money to pay for the glamor has to come from somewhere. So far, the sources of that money are proving to be very weak.

[Anonymous]

San Diego has definitely become a resort destination, like Hawaii, and I think this could keep the rents and the home prices high for many years to come. We in uncharted waters, with SD just finishing its first housing boom in the internet age. The internet fueled the boom by giving people easy access to information about the SD housing market and making it logistically easier for people to move on out here.

San Diego certainly is more attractive than NYC and the other big cities you mentioned on price/sq.ft. basis. But those other cities are more costly due to the fact that they are much bigger and have many more cultural offerings than SD.

What makes me scratch my head is the market in San Francisco. That city is not too much bigger than SD, and the weather is much worse than ours. Why are the same houses selling for 30-40% more money up there? I have friends who just moved into a house for 1.2Mil, but that same house would only get around 700-800k in San Diego. Maybe if we can understand what makes the prices so much higher in San Francicso, we can understand what might be the key to (eventual) higher prices here in SD.

[Daniel]

Another (often overlooked) point: There IS a housing shortage in SoCal (and in NY and SF, for that matter). The fact that we have high inventory and few sales only tells us that prices are too high, not that we don’t have potential buyers.

Two facts: one, the ratio of population to housing units is much higher in SoCal than in the rest of the US (it’s worst in LA County). And two, the percentage of people who own their homes in SoCal is way below the national average. That tells us that there is a gigantic pool of potential buyers out there. Prices are too high today for most of these people to afford anything. But the presence of an enormous pool of potentail buyers should not be taken lightly. Even if the entire SoCal inventory would sell tomorrow, we’d still need a lot more units to reach the national average on homeownership.

[Anonymous]

San Diego looks positively healthy compared to other 'fancy' cities:  San Diego has a higher home ownership rate; San Fran has the highest income concentration (no wonder those liberals feel guilty!), and look at that median price compared to median income!

http://factfinder.census.gov/servlet/ADPGeoSearchByListServlet?ds_name=ACS_2005_EST_G00_&_lang=en&_ts=178983687511

San Diego MSA:

• Median household income: $56K
• % of households earning more than $100K:  24%
• Home ownership rate:  58%
• Median home value:  $552K

Honolulu (city, not MSA):

• Median household income:  $51K
• % of households earning more than $100K:  21%
• Home ownership rate:  50%
• Median home value:  $481K

San FranSicko (city, not MSA):

• Median household income:  $57K
• % of households earning more than $100K:  28%
• Home ownership rate:  38%
• Median house value:  $727K

 New York City (city, not MSA):

• Median household income:  $43K
• % of households earning more than $100K:  18%

[PerryChase]

San Diego in no way approaches NYC, Paris or London in terms of culture. Yes, we have the weather and a relax lifestyle. But as far glamour, resort cities come and go. There many beautiful and cheap places around the world to retire by the beach.

As far as San Francisco is concerned, the city is becoming so expensive that the bohemians who created its culture are moving away. The cost is preventing new blood from moving in. San Francisco is fast becoming a city of the elderly, the tourists and the immigrants. Remember, after WWII, SF was not anymore expensive than other American cities.

If you look at San Diego, except certain central coastal areas, the region is really Hicksville, USA.

I still think a 50% drop from the peak in San Diego is reasonable.

[Chrispy]

“If you look at San Diego, except certain central coastal areas, the region is really Hicksville, USA.”

How to win friends and influence people….

[barnaby33]

Do the numbers for SF change if you include other bay areas? I ask this because its not reasonable to consider only the city when you consinder the metro areas of other places, ie I assume the 5 boroughs of NY.

Josh

[Anonymous]

Yes, when you include the broader MSA, the numbers start looking like San Diego.  But, the comment was that San Fran is a special place, and would hold its value better.  San Fran is different, but looking at the numbers, appears unsustainable to me.  Burlingame, San Mateo, Menlo Park, etc. are nice, but nothing special, unlike San Fran.  And, especially, there's nothing endearing about San Jose/Santa Clara.

[bigmoneysalsa]

I think that what’s being missed in this discussion is that it’s just not possible to reason our way to a conclusion about the relative worth of different places. You can talk about “glamour city” status, weather, jobs, culture, zoning laws, etc until you are blue in the face; only the invisible hand has the power to track ALL the relevant factors in play. And the best way to see what the invisible hand has to say is by looking at rents. Have rents gone up in So-Cal at a faster rate percentage-wise in recent years than the rest of the US? I don’t know the answer, but I doubt it. In any case I think this is really the only way to answer the question.

[BostonAndOC_RE_perspective]

JG,
Not sure if you’re aware, but the Bay area (Silicon Valley up to San Fran) has a much higher concentration of F500 companies and high paying jobs than SD, LA or OC. Menlo Park may not appear to be anything special, but that place is dripping in money (and right next to Stanford and Palo Alto). Ever heard of Sand Hill Road? That’s the VC nerve center of the world. Almost $8 billion of VC money flowed to Bay area companies in 2005, more than the next 11 US tech hubs COMBINED.

The average Bay area household with 2 degreed professionals brings home $300-$750K annually, juding anecdotally from the folks I know who live there. Next to Manhattan, it’s the highest paying region in the US. There is a much higher floor under the prices up there as they’re supported by high wages (and very plentiful jobs – more jobs than qualified applicants).

Do a spin through Zip Realty on the nicer Bay area towns, and then comapre to SD or OC. It is eye-opening. Example: Palo Alto currently has ~30 listings, while Newport beach has more than 700.

[heavyd]

BostonandOC is right, housing prices are set primarily by supply of new homes and demand from wage earners (how ‘nice’ a place is has very little to do with it). In the case of supply, SFO (the city proper) is almost 100% built out — the only way to add supply is to build upwards, which is tough to do given their building codes. And there is very strong demand in SFO from people making good money in high tech, finance (now dozens of successful hedge funds up there), and media. SD has far fewer high paying jobs than SFO or NYC or London, and a quick drive along highway 56 or through the eastern part of Carlsbad or around the ballpark will show you we have LOTS of new supply coming online…so prices fall. Sure, we have nice weather and good beaches, but that’s always been the case. If good weather and nice beaches were the primary determinants of housing prices, Cabo San Lucas would be more expensive than SD…

[blahblahblah]

Boston_and_OC wrote, The average Bay area household with 2 degreed professionals brings home $300-$750K annually, juding anecdotally from the folks I know who live there.

I’m calling bullshit on that one — you may have a lot of high-earning friends, but to say that the average Bay Area 2-income household earns $300K annually seems a bit of a stretch. Also, if your friends are telling you how much they make, don’t forget to apply the braggart deflator of 0.5-0.9 to whatever number they say. People pulling down that sort of green don’t usually go around telling everyone how much they make…

[Author]

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