Rents are up.

[Bugs]

This is an illustration of why it doesn’t pay to wish for everyone else to come to their senses (or to fail) all at once. A more orderly retreat over a longer period of time will result in less collateral damage and fewer unintended consequences.

[murray]

As an owner of 3 SFR rental properties (all located in Tierrasanta) I watch the market like a hawk to gage rents and rental property inventory. My primary sources are Craigslist and the SDUT.
I noticed the number of properties offered for rent in Tierrasanta shift late last summer, soon after I rented out 1 of my rental SFRs. I believe what has happened is the flippers/investors stopped buying properties and offering them for rent, thus reducing the number of properties for rent.
I’ve been “landlording” since 1989 and I have NEVER seen such a dramatic shift in Tierrasanta rental inventory as this – I can’t speak for other areas. The demand side is strong too – I contacted various property owner/advertisers who confirm that demand is strong.
When interviewing potential tenants last summer 1 couple had just sold their SD house and wanted to rent for awhile, another couple same deal but wanted a short lease because they had plans to move out of state. The couple I eventually rented to were from out of state and had a combined income of >$150k but didn’t want to buy in an over inflated market.
In my other SFR, 1 couple with kids moved in from AZ and kept their AZ house with the intention of renting it. Now they are wanting to sell it and having a very difficult time finding a buyer.
In my other SFR, a couple sold their SD house at what they thought was the peak (back in 2002) and rented from me with intention to buy a SD house later when prices declined.

I have older friends who have been in the SD investor/ landlording business a very long time (ie buying Clairemont SFR repos for $18k in the early 60’s) and have witnessed market up and downs but even they are freaked out by what they see is the INCREDIBLE speculation of the past few years. FWIW they predict a 40% decline in property values.

My predictions (baring major wars, economic collapse etc):
Prices: median prices “sideways” – flat to down (~10% max) over the next ~6 years.
Rents: 5% – 8% increases for next couple of years only.

[(former)FormerSanDiegan]

Another rental data point.

Sold our primary residence in SD in 2005, but still have a SFR held as a rental in West Clairemont/Bay Park area. As of this spring this SFR rented (quickly) for 100% of our current carrying costs (minus repairs/maintenance, of course). It is positive cash flow after taxes.
We bought with 20% down in 3Q 2002 for ~340K.

So for central coastal SD I would look for a downside in the range of 3Q 2002 prices, plus whatever rental increases happen between now and the bottom of the market.

My guess: 19% decrease in value (35% for the price difference between now and 3Q 2002, minus 16% increase in rents over the next 4 years).

[powayseller]

murray, can you quantify what you mean with Dramatic shifts? Less supply, more demand? Rough figures for number of units or pricing? Interesting that your renters are prior homeowners, like me. I am renting waiting for prices to drop 50%. More bearish than you. Did you read Rich’s articles off the main page, showing we are double our prior peaks? Why do you think we’ll have only a 10% drop?

[murray]

As I stated there are far fewer Tierrasanta rental SFRs available to rent compared to past years. Previously an average weekend SDUT ad would contain 6-8 sfrs for rent, now maybe only 3-4 (combined UT & CL). These are averages, actual numbers vary seasonally. Combined with the current buyer-seller standoff, low rental inventory will support higher rents for the next ~2 years.

My moderate ~10% r/e median price (clarification:RESALE sfrs) downturn prediction is based on these factors:
– oos boomers retiring to SD area
– ballooning new construction material costs
– general pent up desire to buy (especially bubbleheads!)
– minimal new home construction
– resistance to urban infill densification
– limited cheap land to build on
– demand from natural population increase
– higher rents justifying purchases (in a few years)
– current sellers allowing listings to expire thus reducing inventory, helping to maintain a price “floor” (it’s estimated currently 60% of listings are frivolous)
– exit of flippers from r/e market back to their previous jobs
– exit of investors from r/e market back into stock market
– but mostly because NAR predicts no decline and bubbleheads doom & gloom.

The correction will take years to play out.

The early 90s had defense industry decline with massive SoCal unemployment and r/e median prices declined ~15% in SD and >20% in LA. The early 90s CA economic decline was second only to the great depression!! SD county employment is now diverse so employment hits like the Nokia shutdown (1100?) can easily be absorbed.

A contrarian case for INCREASING house prices: major (world?) war(s) requiring unprecedented defense spending/jobs buildup in SoCal. Pray it doesn’t happen.

[powayseller]

Thanks for your response. I have a different perspective. The last Census Bureau showed over 44,000 San Diegans moved out i the year ending June 30, 2006.

Most employment in the last few years was in construction, real estate, and lending, and in retail and restaurants as people took our the home equity of ever rising home prices to go on shopping sprees. As housing cools, tehse industries that have been our major growth, will keep weakening. Our manufacturing sector is shrinking. Nokia is now thinking of leaving. Before that it was the Sony plant in RB, Buck Knives in El Cajon…

The 44,000 people per year leaving has left many vacancies for doctors, police officers, engineers, cashiers. I keep seeing Hiring signs at so many stores. I read that high housing prices are making it harder for SD to recruit surgeons! The outlook for the San Diego job market is bleak. My hope is that biotech will some day take off again. Our biotech companies are small, and my friend who is a manager at one of them, is concerned for her job prospects and is interviewing in the other big biotech cities.

Rental prices are based on income, and cannot be artifically boosted by funny money. I saw a news story this morning: a mother said her grown children live with her, because rents are so high, and forget about saving for a down payment on a house. The story said you need an income of $40K to afford a median 2 bedroom home, which is about the median wage of San Diego. Only 5 other US cities have higher rents than San Diego, and the ones I remember are Boston, New York, San Francisco, San Jose.

Landlords can ask for the moon, but rents which exceed a person’s ability to pay, will be vacant. San Diegans will move in with their parents or leave the area before they pay higher rents.

The same news story interviewed the young man from UCAN, Michael Shames. He said that San Diego has the same wages as other big cities, but a much higher cost of living in gas and housing. This is known to San Diegans as the sunshine tax. He said San Diegans are well aware of this tax, and people moving here find out about it the hard way.

If I owned rental property, I would cash out now. I think the correction will be huge, rental pricing cannot go up, and it will be another 50 years before we see interest rates below 6%.

[murray]

I lived in SD since 1981 (now currently renting in LA for 1.5 yr)… SD story has ALWAYS been the same: low wages & high cost of living. I scratched my head when houses were $130k, interest rates were high coupled with high unemployment(at times). No matter, the desire to live in SD is SO strong people will do ANYTHING to live there and will buy houses and put up with it. It amazes me. I don’t understand it. Wishing it weren’t so is just a waste of time.

No matter what the economic issue it ALWAYS boils down to supply and demand (with the acknowledgement that govnmnt will tinker with both). Until you take away the demand / desire for people to live in SD prices won’t drop much. Again, the only thing that will derail it would be massive unemployment like in the early 90s.

fyi – SD r/e is a bargain compared to LA.

[powayseller]

Demand has dived off the cliff. We used to sell 42K homes per year, this year we are on track for 30K. People are leaving SD. Check U-Haul rental rates, they are much higher to leave SD to any city, than the other way, because SD has a glut of UHaul vehicles.

Sales are down 30% over last June, and the rate of sales decline is INCREASING. Q4 05 was down 10%, Q1 06 was down 20%, and Q2 06 is down 30%. I think Q3 06 will be down 40% from 2005.

Demand is down, and that is the only reason inventory is high. If we were still selling the same # of homes, then our inventory would be at 16,000 like it was last year. The reduced demand is accounting for the high inventory.

I already gave you the Census Data.

Stories abound, like the haircutter who went to 4 days because so many clients left SD. My friend who’s a realtor said in a recent showing weekend, he heard 5 sellers talk of leaving SD after they sold.

San Diego employers are having trouble filling their vacancies. Qualcomm has 500 openings they cannot fill. I posted an article last week, about a story that doctors are not moving here, and even surgeons and ear/nose/throat specialists are not coming here to take available jobs, because they cannot afford to buy a house here.

Although people want to live here, there is a limit to their ability to pay. We are past that limit, so the tide has shifted. People WISH they could live here, that is true. But they are not able to make that wish a reality.

If you look at the HAI (housing affordability index), the only city in the entire country with a more expensive rating is Santa Barbara. Only 6% of San Diegans can afford a median priced home, so that puts the demand way down.

Also look at what’s selling. The $2mil and up market is hot, but everything else is really slowing down. Even the $2 mil and up market is seeing big price declines, but those buyers are still able to buy homes because their income comes from the stock market, not the low wages we have here. Our city just doesn’t have the types of jobs or salaries for these current prices. If you were an engineer offered $85K to work at Nokia or $85K to work for a firm in Dallas, which would you pick? Most pick Dallas, while the few that pick SD, end up renting. That’s the sunshine tax.

Anyway, the data that I found, and I looked high and low and spend many hours every day researching this stuff, is that demand is down, down, down, and there is nothing on the horizon that would indicate a reversal.

Now I am curious. What data do you have to show that demand is up?

[murray]

I can’t disagree with any of your points. But it doesn’t matter, people want to live in SD. Yes demand will fluctuate but in the end people want to live in SD.

I don’t understand why people sacrifice so much to live in SD but they do. It doesn’t make sense to me, never has, but that’s what I’ve experienced.

50% decline just won’t happen because of the desire to live in SD and own SD r/e. Period.

[CardiffBaseball]

Ok, so Powayseller posts data points, and Murray goes off of feeling.

Period.

I just posted a 200K difference in Comps. As far as Joe San Diegan who gets all their RE info from the YOY report this is the first they have heard it was down.

Also in my nabe, one house started a year ago at 1.3 mill, and is down to 950, and still it sits. All it takes is for one forced to sale to wreck neighborhoods. Here is a near 27% shaving for a house that has sat empty for several months. Someone is burning through some serious cash and nobody wants the house. And, this is just the beginning of the down cycle. The person paid 650, in 2003 so they are still up but how much longer can they burn cash and still pay 6% commission to unload.

[murray]

A 27% shaving off an unrealistic asking price to begin with isn’t a useful metric of market pricing action.

I believe the posting from a realtor who estimated 60% of inventory is overpriced and these sellers are not serious but will sell if someone offers them their inflated price. Others on this forum predict a large inventory drop after summer as these sellers allow their listings to expire and give up.

I’m going with history on my side. I don’t believe the upcoming r/e downturn “will be different this time”, ie massive price declines.

[Anonymous]

50% drop CAN happen. In 1999, San Diego real estate prices were way more then 50% below today’s prices. In 1999 everybody wanted to live in San Diego just as much as they do today. That argument is foolish. Desire to live in San Diego has NOTHING to do with today’s current outrageous prices.

In the long run, San Diego will always cost 2-3 times similar real estate in Indiana or Montana. After prices here drop more than 50%, real estate will still cost 2-3 times more than in Indiana or Montana.

[CardiffBaseball]

If you want to say a 27% shaving off of a ridiculous asking price doesn’t count, then why don’t we just shave 27% off of everything so we can ignore that pesky drop in prices.

Of course everything is overpriced, that’s the whole point.

[CardiffBaseball]

If you want to say a 27% shaving off of a ridiculous asking price doesn’t count, then why don’t we just shave 27% off of everything so we can ignore that pesky drop in prices.

Of course everything is overpriced, that’s the whole point.

[lendingbubblecontinues]

Murray-

Feel free to go with “history on” your “side”. It won’t change the fact that we are headed back to pre-2001 prices all across this great land.

45 year interest rate lows, combined with pent-up demand from the underclass to “own” their own apartments (I mean condos, I guess) led to the greatest Ponzi scheme of all-time here in the U.S. Without the “apartment renter” class moving up and providing vast sums to the lucky few, there never would have been this ridiculous bubble.

Some people here in SD are like me…renting nice homes, making good money, sending their kids to good public schools, and watching incredulously as people commit financial suicide time and again buying more than they can afford. (Probably buying more than they AND five families’ income combined can afford)

History is my guide as well….Irving Fisher, esteemed Yale economist of the late “twenties” noted that stocks looked to him to have achieved a “permanently high plateau” right before the greatest stock market wipeout in history and the Great Depression began. Too many real estate experts are calling for a soft landing and high plateau scenario for this to turn out any different.

San Diego is nice and always has been…do your self and family a favor and don’t be caught dead buying anything there though until we hit pre-2001 prices.

[Author]

Posts