San Diego- Bubble or Healthy Market?

Question

Hi Everybody!

Newbie here trying to learn from the masters ;-)

I am curious about your opinions regarding the near future of San Diego housing market?

The prices in San Diego has been skyrocketing due to low inventory. Any good properties in trendy neighborhoods like North Park and Normal Heights are sold within a week after being listed on MLS.

The banks seems to be much more restrictive in the mortgage lending process (correct me if I am wrong ;-) And plus the mortgage rates are super low.

What do you guys think? Is San Diego a healthy market or a bubble is coming?

David Faulkner · Answer

I completely agree ... and to echo what I think are the key points:

• Always be looking for a good deal. They are always out there, but they will never just fall into your lap, they must be actively found.
• If you find a good deal (relative to the current market) then buy it without too much worry about the market cycle, which are impossible to predict in the short term with any sort of accuracy as to when, where, and how much things may dip. 
• If you do NOT find a good deal, do NOT buy, no matter how strong the market looks . This is essentially rule #2 applied in the opposite direction. 
• As a bonus, rules #2 & 3 will effectively do your market timing for you, since deals tend to be more plentiful at market bottoms than they are market tops. Volatility can be your friend, not always your enemy, as it will allow you to pick up even more amazing deals when the market is cold than you would otherwise be able to do if there were no volatility.
• If and when you do buy, do it in such a way that you can stay in and hold through any short term down cycle that may occur and won't be forced to sell at the worse time. A good deal will insulate you to some degree from the short term market cycles, as will not over leveraging.
• Keep a long term mindset with your investments. Over the long term, San Diego has been a winner and will likely continue to be a winner in the long term future since it is a place where people want to and are willing and able to pay a premium to live, and housing supply is perpetually limited.

Dan H. · Answer

I have invested in San Diego real estate for quite a few years and my family even longer.  I have purchased near market highs and near market lows.   Each purchase, except for the home I live in (purchased in 2004), has had a good to great ROI.  In addition, when the market crashed the rents in my areas barely moved.

My point is that I do not pretend to know the current cycle or the short-term ROI from San Diego buy and hold.  However, history tells me that the long term ROI for San Diego properties will be very tough to beat.  A SFR that I purchased in 1992 near the height of the market that initially had over 10% depreciation has had a very good ROI.  Look at the history.  What is the appreciation of a San Diego home purchased 50 years ago?  In 1969 my parents purchased a starter home for $19.5K that today is worth over $500K.  Appreciation for a purchase 40 years ago? In 1977 my parents purchased a move up home for $72K that is worth over $700K today.  25 years ago? In 1992 I purchased a starter home for $167K that today is worth over $500K.   20 years ago?  In circa 1998 (not sure of exact year) my parents purchased a duplex for $360K that is worth over $1M today.

5 years ago?  In 2010, I purchased a duplex for $303K that is worth almost $600K today.  Some of these purchases initially had some short-term depreciation.

History tells me that if I purchase a San Diego property today that in the long-term it is very likely to appreciate regardless of the cycle and any short-term depreciation.  Therefore I do not try to time the market as much as find properties that provide an opportunity for instant equity (either via rehab, rent increases, or below market price) that at least comes close to cash flowing.  If there were a property in my area of expertise that I could have 10% near term equity gain I would purchase it and not worry if the market depreciates greater than my near term gain in the short-term.   The caveat is that an investor must be able to hold through a depreciating cycle (i.e. do not over leverage such that you will need to sell at or near the market low).

So the prices seem high, but I am still looking for good REIs in my area of expertise and expect in the long term any REI purchase that I do today will have a good ROI.

Dean Carlson · Answer

I agree with @Brian Lacey and I have a little more to add to it.

San Diego is America's Finest City, yet there quite a few cities that I don't think come close to having as much to offer, yet they have much higher real estate prices, for instance: Seattle, Boulder, CO., LA, and of course San Francisco and the outlying areas of it.  The main reason those cities have such high prices is because High Tech industries have moved in with super high salaries. With the idea of "It's not what you make but what you keep that matters", soon they will realize that offering a talented college grad $125K start salary isn't going to mean much because the grad will be spending half their salary on house payments in a climate that is less than ideal.  I predict that the next boom is going to be in San Diego because it's a great place to live, the whether is great and the real estate is cheaper than the aforementioned areas.

If I am wrong on that then the fact that the STVR business is booming in San Diego year-round, which is causing monthly rents to go up and will ultimately cause an even greater demand on home prices.  I think appreciation and rising monthly rents makes San Diego a great investment opportunity for the long term.

Rick P. · Answer

San Diego's median housing prices are roughly 8x the median income of a family of 4 in San Diego.  At roughly a current median home price of $500,000, prices are near their peak of $517,000 in November of 2005.  Obviously prices in hot parts of the city or places like LaJolla make that median metro price look like a comparative bargain. Things are outrageously overpriced in all of coastal California and that is not going to change as long as people want to live on the ocean.  Sure, there will be massive corrections in San Diego, along with Greater Los Angeles and the Bay Area at some point.  These are classic boom-bust markets.  When will that happen?  I don't know.  These aren't local markets.  Buyers come from all over the world to purchase property in these areas.  As Russell hinted at, a large percentage of these buyers are all cash buyers, often from overseas.  We're living through interesting times with $10 trillion plus in negative yielding bonds around the globe.  Emerging markets like Brazil and China have been spooked.  Investors are chasing 2 cap and lower apartment and commercial buildings in NYC and SF.  In my opinion it's a global flight to safety that has inflated our stock market and our top housing markets.  Unfortunately the end result is people being frozen out of the market.

Account Closed · Answer

Hi @Kenneth Hung, call me paranoid or what ever but i work in private equity REOs during the last crash and its just what the market does, nothing stays in the air for ever everything must bounce we are not in a economic position to sustain this kind of grow and rates forever will it fall in the next 3 years probably not so buy away just know when to cash our or what to buy SD i think is one of the best markets to hold property but will see somebody correct me if i am wrong

Rod F. Hatefi · Answer

Prices have already started to moderate and I think we've seen the top of the market for some time. And here are the reasons why I don't think we'll see much of a slow down anytime soon:

1. They don't make much more land in Coastal San Diego! The supply of available land here s very limited and there are plenty of cash buyers, mostly Baby Boomers and some foreign nationals that will continue to vie for the limited inventory.

2. Current homeowners are aging in place and don't want to sell if they can help it.

3. The supply side is constrained by regulatory hurdles and excessive costs. MFUs/apartments are the growth driver for new builds. So SFR rentals will continue to demand premium rents.

4. The job market here is going strong and even if there is a recession, interest rates will continue to be depressed. Should interest rates go up, they won't go up much because the rest of our national debt ridden economy could collapse.

Hindsight being 20/20, there's really never a good time to buy when you're in the moment (i.e., it's daunting during a recession and lending is tight. It's likewise daunting when prices are high and you're looking for cashflow only).  You should therefore always shop around and be careful in what you invest in. But given that you have a 10 year time-horizon and a buy and hold mentality. don't be afraid to pull the trigger and fast!

I hope this helps!

Rod

Brian Lacey · Answer

Bubble is a popular word that gets thrown around.

Seldom is it ever accurate.

SD is just at the top of the typical RE cycle every coastal primary market goes through.

SD isn't cheap and for good reason. Finding deals that can comfortably cash flow are difficult with little appreciation that can be expected in the near term (nearing the end of the cycle).

It's a healthy market, but the dominoes will collapse in SF and run down south to LA and SD, just the nature of California.

Russell Brazil · Answer

I dont know San Diego...but one thing I would look at to try to understand the market is what percentage of sales are being purchased with all cash...what percentage are being purchased with high down payments, and what percentage are being purchase with low down payments. If the market is being driven higher by all cash and high down payment borrowers I would be less concerned than if it is being driven by low down payment borrowers.

San Diego- Bubble or Healthy Market?

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