By Roger M. Showley
Local housing prices are out in front, but can they keep up the pace?
San Diego County's galloping housing market is headed for a perfect trifecta.
Probably this month or next month, but surely by year's end if trends hold, median prices will have topped $300,000 for resale condos and $400,000 for resale houses, joining a record $500,000 set in June for new housing.
Many housing analysts say you don't need to go to Del Mar to find a better play than this threesome, and to watch the numbers climb even higher in 2004, 2005 and beyond.
Still, there are contrarians who warn the race is headed for a pileup, and that when the dust settles in a year or two, prices will be down by 40 percent or more.
Foremost among them may be John R. Talbott, author of "The Coming Crash in the Housing Market" (McGraw-Hill, $14.95). He lived in San Diego for two years before moving to Los Angeles last year, and his observations of San Diego's housing scene set the tone for his Cassandralike predictions.
"If you buy now at these prices in San Diego," he said in an interview, "you will live to regret it."
But few other experts familiar with the housing scene are ready to call this race over, let alone forecast a sharp market downturn. But if there is a consensus pick, it's that local housing prices have moved disturbingly out of line with incomes.
San Diego, they say, is no Seabiscuit, the underdog horse with a checkered record and the subject of a movie released last month.
By contrast, with just three exceptions, San Diego has won the roses for 67 straight months. Since December 1997, median home prices have consistently increased $10,000 or more when comparing one month to the same month a year earlier.
The latest figures for June continued this winning streak.
Resale condominiums stood at a median price of $284,000; resale houses at $392,000; and newly built houses and condos for the first time ventured above the half-million-dollar mark, at $500,250. The county's overall median housing price stood at $390,000 in June, according to locally based DataQuick Information Systems.
The median represents the midpoint, with half the sales above that figure and half below. Individual neighborhoods and properties can vary widely from the overall trend.
The latest year-over-year rises are breathtaking – bringing cheers to owners and tears to would-be buyers: resale condos, up $49,000; resale houses, up $52,000; new houses and condos, up $115,750; overall median, up $67,000.
When this run began 51/2 years ago, the overall median was $192,000.
Leading the state
Placed in context with the state, San Diego is a breed apart. For the first six months of 2003, the county had the highest price increase, 20.9 percent, of any region, and its overall six-month median of $365,000 ranked third, after the San Francisco Bay Area's $422,000, up 6.8 percent, and Orange County's $395,000, which was up 17.6 percent over the same period last year.
Overall, the state median for the first half of the year was $294,000, up 14 percent from the same period last year.
Nationally, it's a horse of a different color. The overall median for resale houses was $176,500 in June, only 7.7 percent higher than a year ago, according to the National Association of Realtors
Builders and real estate agents predictably express optimism that things will continue unabated, and urge people to buy now before prices and interest rates rise. The 30-year, fixed-rate loan hovered just below the 6 percent mark late last month, up from the most recent low of 5.2 percent in June.
Market analysts see no immediate end to San Diego's housing price spiral, but are more circumspect in looking toward 2004 and 2005.
"Inevitably, these things correct themselves," said DataQuick analyst John Karevoll, "and in a year or two, businesses will start threatening to leave California and take the pressure off. We keep getting these analyses that say the sky is going to fall. There just is no indication that that's going to happen and certainly there's not any indication it will happen anytime soon."
Sharon Hanley, whose Oceanside company has monitored new-home sales for more than 20 years, said she detects a "slight amount of flattening" in prices. But with demand for housing still high from a growing population and supplies constrained by lenders, zoning, and insurance coverage limits, an early downturn is unlikely.
"We had a very long, sustained downturn (in the early 1990s)," she said, which as far as I'm concerned entitled us to a very long, sustained upturn, which we're getting. But eventually, the tables will turn."
Stuart Gabriel, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, concedes that San Diego and California's house-price increases are "out of sync with the rest of the economy."
"Either the rest of the economy is going to strengthen or the housing sector is going to slow down," he said.
In Virginia, Texas and Arizona, where land regulation is less rigorous, supply is keeping up with demand and prices are rising slowly, he observed. In California, low interest rates have combined with unmet demand to accelerate increases.
But unlike other states and regions, housing production here has been aimed at the move-up buyer, where profit margins are the highest. Gabriel said that market decision is the builder's right to make.
"It's easy to point the finger at the developer and make the developer responsible for social policy," Gabriel said. "In this country, I think that's an inappropriate thing to do. The developer is somebody who runs his business like anyone else in this country.
"If we want affordable housing built in this country, we need to set up the preconditions to allow for affordable housing – policy incentives, land-use regulations or some sort of process that will make it financially practical for a developer to build high-density housing."
Susanne Trimbath, senior research economist at the Milken Institute in Santa Monica, said a housing bust is unlikely here or elsewhere in the state because builders now presell homes before beginning construction. A decade ago, when the economy went sour, they were left with thousands of completed, unsold inventory and many went bankrupt when sales dried up.
She also said builders find it difficult to increase production because of construction-finance limitations and lack of affordable insurance coverage.
To consumers, she said, renting is becoming more attractive because of rising vacancies caused by renters moving to buy. Apartment buyers also can find good deals due to this shift in the rental market.
"If you're in a house, stay in it and switch to a 15-year mortgage," she said, "because no matter what happens to prices, you'll own it in 15 years."
When refinancing, even at slightly higher rates than available a few weeks ago, Trimbath cautioned against taking equity out for nonhome expenses. "You should be concerned with getting out of paying a mortgage at all."
And if buying is the top priority, she said, take a long-term view, regardless of the outlook for prices and rates.
"Housing prices in the U.S. have gone up 7 percent every year since World War II," she said. "If you can get a mortgage for 5 percent and the prices go up 7 percent, you're ahead of the game. This is very simple. If you can afford to buy, it's very difficult – though not impossible – to get hurt."
Talbott, the predictor of a coming meltdown, bases his concerns on the out-of-whack ratio of incomes to prices, saying in San Diego the ratios are twice or three times the normal rate.
"San Diego had the highest prices in the country relative to average incomes," he said, based on his review of figures last fall. "They've accelerated with the most recent report in the second quarter, so you're probably over seven times household income, which is unheard of."
Nationally, Talbott believes prices will fall back 15 percent to 20 percent. "I believe San Diego could easily be double that," he said. "Forty percent sounds astronomical, like the high-tech boom, but it's just going back to 2000 levels. That's all that means."
Ross Starr, an economics professor at the University of California San Diego, said Talbott could be right that prices could fall, but present indicators do not point to such an eventuality anytime soon.
Interest rates are heading up, he said, but not to the 8 percent level that he believes could choke off housing demand. Federal and state deficits pose a threat to rates, but not for a year or two. The economy here and elsewhere is improving, not deteriorating.
Demand remains strong, he said, especially among first-time buyers in lower-cost neighborhoods. Starr said if the purchase price of a home is less than 288 times your monthly rent, you're better off buying, assuming a 6 percent interest rate and 35 percent federal and state income-tax bracket.
For example, if you're paying $1,000 in rent per month and you can buy a home that costs less than $288,000, you're better off buying, according to Starr's calculations. The payoff changes as income-tax brackets and interest rates change.
"Will the California owner-occupied real estate market eventually see a decline in prices?" Starr asked. "Absolutely, depending on how old and healthy you are, it will happen, from one year to the next. Yes, definitely."
But waiting for a drop can prove foolish, he said, as the last two years of San Diego run-ups indicate.
"If you were thinking in 2001 to wait til now to buy," he said, "you'd be kicking yourself."