Piggington's Mailbag: Why San Diego?

Submitted by Rich Toscano on July 17, 2005 - 9:50pm
Reader Jonathan writes:

I agree that the “everyone wants to live in San Diego” mentality for the recent status of the real estate market is ludicrous. However, what I believe is missing from the argument is; why San Diego? Why haven’t we seen the same speculative bubble happen all across America?

This is an interesting question. Low rates and rock-bottom underwriting standards are national phenomena; why have prices grown so much faster in San Diego than in most of the country?

The answer is that E-Z credit is not the only necessary ingredient in the primordial ooze from which a speculative mania emerges. Also required is panic buying: the widely-held idea that if one does not enter the market now, one will be forever priced out.

In the coastal regions, heavy land-use regulation induces delays in builders' abilities to respond to increases in demand. This lag often results in tight for-sale inventories, and people confuse temporarily tight inventories for permanent shortages of housing. Combine this misperception with loose lending and you've got yourself a potential bubble.

Builders in areas with less regulation and more elbow room tend to be able to respond much more quickly to increasing demand, so the above turn of events is less likely to take place in West Texas than West Hollywood.

However, San Diego real estate has had more going for it than overbearing zoning laws. If you've read the Bubble Primer series, you know that in the mid-1990s San Diego homes were actually quite undervalued in the aftermath of a local recession and housing bust. Home prices started back up after the economy bounced back, and they continued up as San Diego weathered the 2001 recession better than most cities. By the time rates started heading down in earnest, San Diego home prices had already gone up so much that the low rates combined with low inventory to render a feeding frenzy practically inevitable.

In short, while some ingredients of the bubble-spawning primordial ooze are present nationwide, some ingredients can only be found locally. And late-90s/early-00s San Diego featured quite the potent brew. San Diego's real estate runup may have been expedited by factors that aren't found everywhere, but that doesn't mean that these factors actually justify San Diego home prices.
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