There are worrying signs that another housing bubble is on its way to San Diego. But take heart, San Diegans, we may be heading towards a real estate bubble, but we’re not there yet. Rapid price increases, low inventory and high demand are among the troubling signs that may indicate a future bubble.
San Diego Association of Realtors’ numbers show that home prices for existing detached homes are 24% higher so far in 2013 than they were last year in San Diego. This run-up in house prices is fueled by high demand, low interest rates, and the belief that prices will continue to climb. Add to that, there’s an acutely limited supply of houses for sale, which will undoubtedly take a long period of time to replenish and increase.
Over 30 percent of San Diego County homes sold in August were purchased with cash which is considerably higher than the historical average of 16 percent. These cash buyers believe that profits can be made through short-term buying and selling. This has further driven demand.
While a bubble may be on its way in the future, it won’t be here for a while. Housing markets are cyclical and so are bubbles in housing markets. Historically, stock market bubble bursts occur on average every 13 years and last for 2.5 years. Housing bubbles bursts are less frequent, but last nearly twice as long and lead to losses that are twice as large. It’s just too early for another real estate bubble.
Perhaps the most important reason why another housing bubble won’t occur anytime soon is simply because the last one occurred so few years ago. On December 30, 2008 the Case-Shiller home price index reported its largest price drop in its history. Pre-bubble burst, the mentality was that housing prices would always rise. We are much more cautious now. We know that house prices will rise in the aggregate; since 1975 house prices in California have risen 6.63% every year on average (that’s even including the last bubble burst). We also know that a rapid, nation-wide, drop in prices is a real possibility. This knowledge leads people to cautiously tread where before they leapt.
Furthermore, the rise in prices now, as opposed to pre-2008, is based on sound fundamental factors including increased job growth, low interest rates, low construction, and reduced foreclosures and short sales. Prices are rising fast now, but a gradual increase in interest rates should ease the pressure behind the rise to a sustainable level.
As house prices rise, distressed sales have declined and more traditional-sale homes have come on the market, slowly increasing the supply of homes available. Average people are beginning to realize that they can put their homes on the market and gain a profit on the sale. People who had to settle before for a condo in a “so-so” neighborhood are selling those condos and moving-up into their dream homes. Moving-up is something that happens in a normalized market.
Some of the key elements of the last housing bubble were banks issuing risky loans, price increases significantly above historical averages, and banks pushing adjustable rate mortgages on the public. We’re not seeing these elements now. Banks are now heavily regulated and much more cautious when lending money on real estate. Gone are the zero-money down, sub-prime, stated-income loans of the pre-bubble burst.
If we fail to learn from the past and begin once-again to latch on the fallible notion that prices will always rise, we may see another housing bubble in San Diego. Responsible lending practices, a gradual decrease in demand from rising interest rates, and a shift towards traditional home sales will ensure that the bubble won’t be anytime soon and it won’t be anywhere near the magnitude of last housing market bubble.
- Tanya Hertz, MBA
President of Omni California Real Estate
Business Professor at San Diego State University
01 Aug 2013
The following post was written by Tanya Hertz, Broker of Record at Omni California Real Estate.
12 years ago, I was a brand new agent, looking to take San Diego real estate industry by storm. I had no clients, no marketing budget, no experience and all the drive in the world. I was sure that I would make a million dollars and it was going to be easy. My lofty expectations seemed validated when a former customer, Tom, from the general aviation airport where I used to work, asked me to represent him in buying a house. Tom’s budget was $3 million.
When we showed up at the first $2.3 million listing on top of Mt. Helix, Tom met me there; he arrived in his beat-up Toyota truck; I pulled up in my circa 1984 VW Fox. Tom was a successful entrepreneur and aviation enthusiast. When the homeowners stepped outside to greet us, they saw a middle-aged beach bum with a too-young agent, driving crumbling vehicles. They almost turned us away, but begrudgingly let us walk through the house following us closely to “make sure we didn’t steal anything”. Needless to say, Tom didn’t buy the house. They ended up selling it for less that Tom was prepared to offer.
That lesson has stuck with me throughout my real estate career, and keeping an open mind is a cornerstone principle at our independent real estate brokerage. Since then, I’ve had numerous clients who were very well-qualified that didn’t necessarily fit society’s image. I’ve also met plenty of “posers” who looked great in a suit, but were hanging on to to their image by an over-leveraged thread.
The same holds true for houses. I’ve seen many badly-flipped houses. I call them Monets; they look good from far away. Sure, they have fresh paint, new carpet, and granite, but sod was thrown down on top of weeds and termites are holding hands to keep the houses standing. Well-built and meticulously-maintained homes with outdated decor are often overlooked for the quick-flipped homes.
I encourage you to keep an open mind when showing your house or looking for your next house. Above all, don’t judge a book by it’s cover.