Southern California's Role in the Housing Market

During 2007, Southern California and more specifically San Diego and Los Angeles, were hit very hard by the declining market.  This is no secret.  As we watched the whisper of a real estate bubble turn to a national media frenzy the sales of San Diego condos and Los Angeles condos slowed dramatically causing inventory levels to rise, values to drop, and layoffs to occur in the construction and mortgage industries.  The most optimistic of analysts and economists stated in 2005 that there was no bubble and that the market might correct but not crash.  This was true for some markets but not most.  Now these more optimistic analysts are saying that we will continue to see condo and home values decrease for another 6 months to a year and start to see a correction in 2009.  Of course this means that market conditions may not be what we would consider “good” until 2010 or 2011.

Some real estate professionals in San Diego and Los Angeles feel that there is at least an inkling of consumer confidence starting to emerge.  Not so much in the fact that the market will correct soon and become healthy, but that for long term thinkers and condo buyers…now is the time to buy.  There are and will continue to be great opportunities through 2008. 

Most economists believe however that the market cycle has not run its full course and that we will not see the sale of San Diego condos and Los Angeles condos increase again until 2009.  Home sales are expected to decrease another 10% or so during 2008 despite the fact that it is a “buyers market”.  Too many people are so nervous about buying and then seeing a decline in value.  People need to stop thinking of their homes as money-makers and just think of them as homes.  Yes, no one wants to buy then see the value decline $50,000 or $100,000 over the first year of ownership but buyers need to think more long term. 

Other more pessimistic economists believe we will not see a correction until 2011 or 2012.  Yikes!  Unfortunately the pessimists won in the original argument as to whether we were in a real estate bubble.  The overall health of the national housing market is important to San Diego because we were one of the markets that experienced a doubling of median home prices between 2000 and 2005. 

Housing booms of course can not be looked at a bad thing, simply part of the cyclical nature of the housing industry.  During the boom in Southern California, developers began building many new San Diego condos and Los Angeles condos and homes creating a wealth of jobs in the construction and real estate fields.  25% of the job growth in San Diego from 2001 to 2005 was in the real estate industry.  Unfortunately many of those jobs were new agents trying to break down the relatively low barriers to entry.  While the barriers to entry into the world of real estate agents may seem low, creating a successful career amidst the vast sea of competition is another thing.

The quickly increasing home prices drove more and more investors and speculators to the table thereby further fueling the fire.  Home and condo owners, while experiencing a feeling of new found wealth began driving up consumer sales as well while they took out home equity lines of credit to buy new cars and luxury items.  This is called living well beyond your means and no financial planner or “wealth” manager would recommend it.  People who got it at the right time investing in San Diego condos and Los Angeles condos were able to flip these assets for a decent profit.  Most however did not quit while they were ahead and continue to purchase condos and homes.  Now many self proclaimed investors are stuck with assets they can’t sell, condos they are renting for a loss, and mortgages they can barely pay. 

Many economists are comparing the recession of 2001 to what they think might occur during 2008.  San Diego economists acknowledge that during the recession of 2001 San Diego was not hit as hard as other cities because of our diversified economy.  Keep in mind though that the recession was driven by increasing employment rates and labor cut backs.  This recession (if it occurs) will be fueled primarily by loan defaults, bankruptcies, and declining employment opportunities in construction and real estate.  Therefore, San Diego might not be so recession proof after all.

Despite all of this, mid size developers and home builders are still planning and building new San Diego condos and Los Angeles condos in the very low or very high end.  The high end side of the condo market has not been hit so badly because the more affluent people purchasing these homes do not care as much about the market cycles. 

We will see over the course of this next year who wins the debates, the pessimists or the optimists!