San Diego Housing Market News and Analysis

Employment is on the rise in San Diego, although the housing boom beneficiary sectors are starting to show a little wear and tear.

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OK, indulge me for one more 1990s housing bust fun fact and then we can return our focus to more contemporary concerns.

As we've discussed, everyone holds job losses responsible for the downturn. But not just any old job losses -- the blame is laid specifically at the feet of the defense and aerospace industries, which suffered as the Cold War wound down in the early 90s. And thus is born one of the bullish analytical classics: the "diverse economy" argument. Since defense and aerospace comprise a much smaller proportion of San Diego's economy in 2006 than they did in 1990, we are immune to job losses and a resultant housing downturn.

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Here are the pre- and post-1990s correction rents, prices, and monthly payments as requested by a couple of commenters:

Last week we determined that San Diego's early-90s housing downturn was not caused by unemployment, as it is ubiquitously believed, nor by interest rates.

Yet the price of a typical single family home price fell by 17 percent between 1990 and 1996. A price decline of that magnitude and duration must have had its cause in something. And it did -- but that primary cause was not external to the market itself, and it wasn't anything that took place during the downturn.

The housing bust was the inevitable result of the housing boom that preceded it.

A speculative bubble took place in the late-1980s San Diego real estate market. For a brief peak at some evidence, consider the accompanying chart of San Diego home prices and rents in the half-decade leading up to 1990.

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We determined in a previous episode that despite an overwhelming belief in the idea, job losses did not trigger the early-1990s housing downturn. Something else must have been at work... but what?

Today we'll turn our suspicious eye toward interest rates. After all, potentially higher mortgage rates are the clouds on the horizon of even the sunniest real estate forecast. As long as rates stay low, bullish housing analysts routinely tell us, home prices should hold up. (This statement is often followed by a silent prayer to the gods of the bond market). So it seems reasonable to wonder whether uncooperative interest rates were at least partly responsible for the 90s downturn.

The answer in this case is a resounding "no."

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The permabulls are drooling all over themselves with glee about a recent study indicating that the median San Diego home seller in recent months collected a tidy 91% profit on his or her home. Of course, this doesn't include transaction costs, improvements, or cash-out refis along the way... it is just a comparison of prior sale price and recent sale price. Even considering all that, though, 91% sure isn't bad.

But this is all a waste of perfectly good permabull drool, because the statistic in question has nothing positive to say about the future disposition of home prices.

Break out the flannel shirts and re-insert those body piercings, because we're headed back to the early 1990s. The good news: no Judge Ito jokes are forthcoming. The bad: I can't say the same about housing charts.

The idea that San Diego's early-1990s housing bust was caused entirely by local job losses has provided comfort to many a real estate investor in recent years. If job growth can just stay positive, the soothing logic goes, then we can avoid the ugly outcome that took place the last time around. The appeal of this line of thinking, which appears to be almost universally accepted as truth, should be obvious.

But the evidence doesn't support the theory that unemployment was the sole cause of the housing bust. Have a gander at the following chart, which details the monthly changes in San Diego home prices and employment from 1990 through 1997:

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The following slew of charts depicts October's housing market activity here in San Diego. Executive summary: the slow grind downward continues apace.

Prices

From the prior month, median prices declined 2.7% and 1.3% for detached homes and condos respectively.

Sometimes I wonder if the folks at the National Association of Realtors are actually trying set themselves up for future trouble.

First they released their so-called anti-bubble reports to demonstrate that "the facts simply do not support the possibility of a housing bust." In addition to the usual poor analysis we have come to expect from this outfit, the San Diego edition contained a blatant falsehood that remains there to this day, despite the fact that I repeatedly notified NAR of its existence back in March.

Now, they are at it again with their new $40 million dollar ad campaign to let us know that "It's a great time to buy or sell a home."

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Last week, Scott Lewis SLOP'd about the San Diego County pension system's sizable investment in D.E. Shaw, a hedge fund that is heavily involved in so-called "credit default swaps."

If you're like most people, you probably started to lose consciousness by the end of that last sentence. But stay awake if you can. Because it turns out that San Diego's fortunes are very much tied to these arcane financial instruments

Credit default swaps, or CDSs, are basically a form of insurance that lenders of money purchase in order to ensure that they will be paid back. That, at least, is the idea. Let's examine a hypothetical, certainly oversimplified, but hopefully illustrative day in the life of a CDS.

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Some folks didn't cotton to my conclusion that the DOF population data was probably better than the Census Bureau data, so I thought I'd clarify my reasoning.

I do not pretend to know much about the ins and outs of tax returns vs. driver's license issuance or for that matter any of the other methodological differences between the two organizations' figures. Nor do I really care to take the time that would be required to dig into it (for reasons that are explained below).

I mentioned in the last article that positive job growth belied a population decline. This was, for me, the deciding factor. Let's look at those numbers:

We never quite settled the issue of the dualing statistical bureaus and their respective takes on San Diego population growth. The U.S. Census Bureau, as you may recall, indicated that San Diego County was experiencing negative net migration, meaning that more people were moving out of the county than moving in, to such an extent that population growth had actually gone negative in 2005. The California Department of Finance, meanwhile, reckoned that both net migration and population growth were positive.

So why the big difference, and more importantly, who was right?

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Employment within San Diego's "housing boom beneficiary" job sectors (construction, finance/real estate, and retail) has been effectively flat since last year. The number of people employed in this sector in September was down a razor-thin .1 percent from the prior September, according to the latest batch of Bureau of Labor Statistics data.

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Back in February, I wrote here about a California Association of Realtors' prediction that when all was said and done, the median price for California homes sold in 2006 would be $575,500. Such was their apparent confidence, I noted at the time, that they didn't even feel the need to round to the nearest $1,000. Yet the forecast turned out to be off by a bit more than that, as CAR's most recent projection for the 2006 median has fallen to $561,000.

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It's time for the belated monthly sales data roundup. Let's dive right in...

Median prices were down year over year for all involved: