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Jim Scott
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Fool's Errands and Other Subjects

The repricing of San Diego residential real estate equity and debt is well into the fourth year. The Great Meltdown that originated in lower Manhattan happened just eighteen months ago, but here on Main Street the bubble started leaking much earlier. Affairs improved much faster on Wall Street than here and that is probably not a surprise given the size and swiftness of the Federal intervention. Those of us in steerage were last to the lifeboats.


There are hopeful signs of recovery that can be divined from the national numbers on housing. But real estate is personal. Our future will not play out the same as may occur in other metropolitan markets. There is still relevance of the concept of San Diego Exceptionalism.


The news reported on the local housing sector during the first quarter has been strikingly different from that of the latter part of 2009.  Financial news, when it comes to real estate, generally looks backwards; it is the nature of this market that changes very slowly.

There is value to old good news as it can influence demand. 


In spite of the statistics, there are local realities at play that need to be watched. Professionals on the ground know that in certain segments of the marketplace sellers are having their way. Buyers trying to purchase homes under $550,000, in fair-to-good locations, are finding it a tough slog. Their disappointments probably spring from spending too much time online. 


Ordinarily this market distortion in the starter-home category would be a harbinger of better times ahead for the middle and upper-segments of the realty market. The move-up buyer has always been the key component to driving prices and sales in San Diego. At times 'moving up' has become a local sport. Sellers of entry-level homes are not trading up these days. The majority of these owners are in financial distress and are walking away with no capital to reinvest and a shaky credit score. The result is that the $600,000 to $1,000,000 market segment is lacking qualified buyers--and this effect runs uphill.


This phenomenon partially explains the sluggish market in Mission Hills. There is a crowd of good upper-level homes competing for the occasional move-up (or move-in from another city) buyer. While the slow rate of sales is not good news, prices in this sub-market have remained remarkably stable since the Great Meltdown. The gap between bid and ask remains stubbornly in place and until sellers price to the market, the inventory in this segment is only going to get bigger. 


Waiting For....


The improvement in prices and sales will not mirror recoveries past. I have argued that the future Metro market will more resemble the 1950s than the past decade as personal debt, demographics, and incomes will restrain price increases. Home prices still are too high relative to our community aggregate income if you use historical measurements. Eventually there will be a confluence of real spending power and prices. (not fake like during the credit and speculation bubble) The San Diego Exception will add a few points, but future appreciation will not approach the dizzying increases we have witnessed in the past. 

Much of the economy has been on hold as of late although you would not know it judging from the stock market. The monetary upset in Europe and the health care debate has weighed heavily on business and family decision makers. Both issues are mostly settled and I think we will see at least a cessation of job losses. Fear and stingy banks continue to stalk employers keeping them from adding to payrolls although there is hope ahead. This area stands to benefit from Federal stimulus funds and military spending. Local businesses, for example Cubic Corporation which just got a $13m contract for building a virtual trainer for the Bradley Fighting Vehicle, will continue to dine at the public trough. International conflict has always been good for San Diego and I see a steady stream of contracts in the future as our world just seems to be getting less safe.


This recovery is going to be different from other post-war business cycles. There is little question this recession is not over and the effects will act as an anchor on our economy for years. This combined with the aging of the first wave of baby-boomers augers for a lower housing price structure in the next decade. Rates no doubt will go higher when the Fed starts removing stimulus cash from the system. The real winners in the future will not be those who were lucky enough to have bought at the bottom of the price cycle, but those who purchased their money at today's rates. The economic value of the price of money will trump appreciation.


Money will eventually be more expensive as our nation must settle up and pay for the tax cuts of the past decade, two wars and the stimulus package, all of which total about three trillion dollars of recent borrowing. Then, as soon as meaningful hiring begins, Mr. Bernanke will take away the punch bowl.      











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