As San Diego home prices continue yet another year of substantial increases (a 7% annual increase is expected again this year), the question being talked about now is whether we are entering into another housing bubble. An interesting study was just released by London Moeder Advisors, a major consulting firm to real estate developers and others, stating what many already believe, that San Diego has now entered a “perpetual” economic imbalance between the supply and demand for local housing. The study which was prepared for the San Diego Regional Chamber of Commerce stated that nearly 100,000 housing units were needed to be created in San Diego between 2012 and 2020 but only approximately 20,000 units have actually been built. That leaves San Diego housing supply greatly lagging demand and in a “perpetual” imbalance going forward.
One reason for the lack of new housing supply is that after the housing crash of 2007, the pendulum swung intensely in the other direction as a reaction to the economic downturn. Many developers went bankrupt or quickly exited the Southern California market. It has taken a long time for developers to reenter the San Diego market in a significant way. Sure, some condo and apartment buildings have been built in downtown San Diego and Mission Valley but that new supply is nowhere near what is needed to satisfy local housing demand. Very few new communities, such as Carmel Valley, Eastlake in Chula Vista or 4S Ranch have been built in the last ten years. Of course, other impediments to new housing supply include the very high cost of construction here in San Diego and high building regulations. For example, last month, Sacramento added approximately $16,000 to the cost of building a new home by mandating the installation of a solar electric system. Also a lack of available land limits the ability to build large new neighborhoods. San Diego County is of course landlocked by Camp Pendleton to the north, the Pacific Ocean to the west, Mexico to the south, and the mountains and deserts to the east.
A recent study from Regions Financial Corporation chief economist Richard Moody stated “Given that we see little reason to expect meaningful relief on the inventory front over coming quarters, we think it reasonable to conclude that we have passed the cyclical peak for existing home sales.” Moody believes that without significant new housing development here, home sales will begin to decline. There continues to be an influx of new residents to San Diego. Populations naturally increase over time. In addition to locally born new residents being created and citizens from other states moving here from declining states such as Illinois, foreign born residents continue to pour into all parts of California. California real estate purchases are popular among international residents as a safe haven to park wealth.
San Diego continues to attract business and commerce. In the pharmaceutical sector, San Diego leads the way with such fast growing companies as Novasyte who provides support services to the pharmaceutical and biotech industries and MedImpact who provides distribution services for medicines worldwide and who is currently constructing a second large office building in Poway next to their existing building. In addition to tech giant Qualcomm, we have fast growing cybersecurity and cloud services industries popping up with Proficio, Big Green IT and even FICO growing their operations here. With these companies continuing their San Diego expansions, their ever budding worker base will continue to put added pressure on the demand for local housing.
So what does this all mean going forward? We are not in a housing bubble! Housing bubbles are traditionally defined by an oversupply of inventory on the market and for-sale signs everywhere, forcing home prices down. We are actually on the opposite end of that spectrum where the population of San Diego continues to steadily grow, with no meaningful increase in new housing stocks for the region. We have less than 3 months of home inventory on the market, an unusually low supply, historically. Residents are staying put in their existing homes these days and not interested in “moving up” (or down) like in past cycles. Basic economic principles dictate that (without some unknown catastrophic event occurring) San Diego home prices will continue to rise in San Diego over the long-term. One just needs to look at extreme price rises over the past decade in San Jose and San Francisco to figure out what is now underway here in our nation’s 8th largest city.
With our national economic growth moving towards a robust 4% annual increase in GDP for the foreseeable future, the median home price in San Diego County will continue to move higher. The San Diego County local governments have few solutions to provide the over 100,000 housing units currently needed and 500,000 units needed over the long-term. Yes they are increasing density by allowing for more ADU’s (granny flats) and are talking about somehow supplying more affordable housing through bond offerings. But something has to give, and that would be found in continued home price appreciation. So with domestic and international demand for San Diego housing only continuing to increase and the growth of new housing inventory in our county severely limited, property prices can likely only move up over the coming years.
If you are currently renting, expect rents to also rise sharply as housing demand increases and housing supply stays stagnant. Additionally, areas such as Mission Beach are rapidly turning long-term rental units into weekly vacation rentals, further reducing the supply of annual rentals. If you are renting, call me soon to discuss getting you into property that will protect you against rising rents and get you into a winning property investment with the pride that comes from home ownership. Earlier this month I was honored to close three deals, allowing three amazing families to get into their dream homes. There is still time to get into a great property. Call or email me: (619) 589-9500 or CollegeAreaRealty@gmail.com
Sarah Ward is the marketing manager and lead agent at College Area Realty. Sarah loves practicing residential real estate and for over seven years has been assisting buyers and sellers achieve their real estate goals. Sarah is a known local marketing expert who has spoken in front of thousands of people on such topics as Effective Business Marketing Strategies. Sarah is a San Diego State Alumni and after living in the College Area and Kensington for many years now resides in Talmadge.