RIP: San Diego

[4plexowner]

It was a comment well worth repeating, IMO.

The San Diego rental market is about to be blessed with MANY more rental units.

There will be thousands of rental condos downtown.

There will be entire condo projects (both new-construction and conversions) that will fail to sell and will become rental units.

Most of those vacant SFRs sitting on the market right now will become rentals. (another thread posted that there are 2900 vacant SFRs currently on the MLS – don’t tell me that a vacant house is owned by someone who is “testing the waters”.)

Many of the tract homes that are currently on the market and are still being built will ultimately become rentals. How much demand can there possibly be to buy low-quality tract homes in the $700K – $2mil price range? (beam me up Scotty, there’s no intelligent life on this planet)

Contributing to this rise in rental inventory will be the exodus of wage-earners from San Diego.

Some of this out-migration will be of people formerly employed in the real estate industry. Many of them will try to remain in San Diego but will ultimately tire of life as a waiter or waitress (or other jobs in the “hospitality & leisure” category) and then move on.

The more worrisome exodus is of the people who are choosing to leave San Diego because the cost of home ownership is too high. Realizing they will never obtain the “American Dream” of homeownership in San Diego, they are moving on to other locales.

Along with this out-migration of people, I believe we may also see an increase in the occupants-per-dwelling number. As inflation continues to feed into the cost-of-living, people will choose (or be forced economically) to double and triple-up in existing housing units. This trend (if it occurs) will reduce the demand for local housing units.

In summary, I see lots of new rental housing becoming available in the next two years. These new rentals will come from two sources: 1) over-supply of condos and tract homes; 2) reduced demand for housing as people leave San Diego and increase the occupants-per-dwelling number.

[Bugs]

I agree with the part about the effects of outmigration and doubling up to the extent that occurs, but I disagree that rising inventory will force those units into the rental market. I think the gap between market rents and market prices is so high that the average investor wouldn’t be able to carry the nagative cash flow even if they wanted to.

Some of the high-rise developers or their successors will probably be able to carry the condos, but the SFR developers can’t possibly do it nor can most of the investors. Even a homeowner looking to downsize wouldn’t be able to justify renting out their house and moving into an apartment because of the negative cash flow on the house – they’re better off trying to make-do.

One way or another these alternatives will seek equilibrium. Either the rents will increase and/or the prices will decline until that gap reduces to something within reason. I think that unsold listings will either be retained as principle residences, be discounted until they do sell, or else they’ll go into foreclosure. I don’t think renting them out is a viable option for most would-be sellers.

[barnaby33]

Instead of sounding quit so confrontational, how about just asking him to clarify. Then if he doesn’t you can be more forceful in your call-outs. You appear to be a relatively new poster. Bugs has been active and posting for quite some time.

Josh

[4plexowner]

I agree that many current owners and developers won’t have the option of keeping their excess (non-owner-occupied) real estate as rentals.

That’s what short sales and foreclosures are all about.

Some units may have to be purchased and foreclosed more than once before reaching a price where an investor is willing to hold long-term as a rental.

Personally, I won’t be buying any rental units until gross-rent-multipliers are back in the 8-10 range. That means the $2500/month rental is worth $240-300K to me today.

How does a $700K 2 bedroom condo downtown become a $300K condo? I don’t know but that’s what I’m expecting. There will probably be many foreclosed “homeowners” and bankrupt builder/developers along the path.

[Bugs]

Does anyone remember a certain downtown high rise condo building that sat vacant for almost 10 years and went through 3 changes in ownership whilst awaiting better times? They let those units stand vacant rather than rent them out. The Union-Trib ran an article on the one guy who had purchased a unit and how he had all the common areas to himself.

That was one strategy. I wouldn’t think it would happen again but….

[4plexowner]

I think you are referring to the two round or oval towers just across from the convention center. They are black or very dark brown.

If I remember correctly, a single penthouse unit sold for $1.5 mil (which was big money in the 1980’s) and the guy had a private entrance and elevator up to his unit. The rest of the tower (towers?) was empty.

~ ~ ~

I’m hoping that many of the condo projects currently planned for downtown don’t get built. It appears to me that the market is more than saturated already and there are still several thousand units to be built.

[Bugs]

I was trying to avoid directly identifying this project, but yeah, that’s the one.

Actually, I think that there’s a huge market for housing in the downtown area. I just disagree that it all needs to be in the form of luxury condos geared for adults. There’s nothing wrong with average quality and reasonably priced condos or apartments.

[barnaby33]

As long as they have granite countertops and travertine floors! No laundry in unit though.

Josh

[powayseller]

burger007 – are you refinancing your 5 year ARM, or hoping that 2009 rates will be lower than today? An 8% cap, if it happens, could almost double your mortgage payment.

sdr – I think the inventory is climbing because sales are down, not because we have more listings. Because sales are down 25% – 30%, the new inventory is just piling on to the old inventory. Some sellers have to take their property off the market if they can’t get their hoped price. My neighbor falls into this category: after listing for 6 months and not getting the needed offer to buy his move-up home in Temecula, he had to stay put. He couldn’t bridge the gap without getting the top dollar.

Also keep in mind that while we had a population increase of 50K annually for 10 years, we are now seeing people leave: 44000 people in the year ending June 30, 2005. I read a different figure of 8K recently, so I don’t know which number is correct. But the trend is there, and likely to pick up as jobs are lost.

So people are leaving, occupancy rates are decreasing, vacancies are rising, and the sales price goes down. Remember too that builders are still adding to the inventory. When will this ever stop???

Bottom line: inventory is rising because sales are down by 30%. Sales are down due to the loss of population. Each sale lost affects several other home sales lost. With 44K people leaving, or 15K families, that’s about 8K home sales lost.

Docteur – when comparing to the last downturn, factor in the tax law change that allows people to pocket up to $500K of tax free gain. This encourages home sales more than in the past. Also remember the ARMs and the pressure put on borrowers who have loans at 33% of income, and now that payment goes up 35%. Ouch – what to do? Add the reversal of population, slowing economy, and I see a trend for more inventory.

I heard that 30% of homes are vacant, from a friend who attended a Data Quick meeting. Add some other percentage to represent the 40% of ARM buyers in recent years, and we have a solid base of sellers who are not testing the waters, but trying to get out while they can.

sdr – I give you permission to discuss my ideas, opinions, and analysis, but not my personal life. Why would you call my house location a meth capital? Perhaps Lakeside, 9 miles away, has some meth labs? My property was closer to Poway than Lakeside. By the way, Poway has the most open space and lowest crime rate in the County.

For anyone considering selling their home, I will correct a statement made about me. We sold it purely for the money. After the move, I came to love this rental house and the advantages of renting.

I disagree about the advice of “buying the gap in a better market (less inventory)”. First, you cannot buy/sell to your advantage in the same market. You either benefit as the seller, or as the buyer, but not both. Less inventory means you have the seller’s advantage when you sell, but you will not have the buyer’s advantage when you buy. It’s either a seller’s market, or a buyer’s market.

Second, although inventory may drop off in the fall, so will sales. The market will keep getting worse, because sales will drop even faster than inventory, and the DOM will keep going down. Some day, the market will get better, but we are at least 5 years away from that.

I agree it is better to wait to buy up to get the lower tax base.

OTOH, interest rates may keep going up. We could end up with a federal funds rate of 7% or 8%. With worldwide inflation increasing, the dollar losing value (which makes imports more expensive) and commodity prices rising, the Fed may have to raise a lot to keep inflation in control.

[North County Jim]

I heard that 30% of homes are vacant…

PS, would you care to qualify that a bit more? Is that 30% of all homes in the county? 30% of new homes?

In any event, that seems to be a very unrealistic number.

[powayseller]

A realtor’s friend got this from a Data Quick presentation. Does anyone else here know if this can be substantiated, or how to find out how many vacant homes there are?

Both homes for sale on my street are vacant.

[North County Jim]

PS,

It sounds like you’re trying to say 30% of resale homes are vacant.

That number sounds high but not outrageously so.

[sdrealtor]

Calculating the exact number of vacants is impossible. The best way to do it is to create a custom search in the MLS for occupant name = vacant. Many vacant properties dont have “vacant” under the occupants name so this number will be very low. Using this methodology I came up with 5470 vacant properties out of 22043 active properties. Based upon this data, i’d say the 30% figure could actually be too low!

[North County Jim]

Based upon this data, i’d say the 30% figure could actually be too low!

Wow! I think it’s safe to assume we can eliminate these people from the “Testing the Market” category.

[powayseller]

Good research, sdr. What conclusions can one draw from this? I don’t profess to know.

[Author]

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