In May 2016, San Diego, California, was the “eighth-hottest” home market in the United States according to Realtor.com. That had the media, analysts and even some economists starting to whisper the word “bubble.”
At that time, Think Realty Magazine took a hard look at the San Diego housing market (“San Diego: Too Hot to Handle?” – March/April 2016 issue) and concluded that “any serious market tremors” were at least 12 months away, citing some easy indicators for investors to use to raise caution flags in the future. Those indicators included the appearance of “monster growth” in housing prices, an increasingly severe lack of affordable housing in the area and median home prices stratospherically higher than historic median levels. We also noted that San Diego real estate, unlike the real estate markets in many other popular areas of California, still allowed investors entrance into the market via multiple avenues, including limited wholesaling, renovating and flipping, and assembling a rental portfolio. Six months later, our prediction is holding up: the market remains sound but investors should continue to watch it closely.
Let’s look at our previously established “caution signals.”
APPRECIATION: In May, projected annual appreciation in the San Diego area was fairly low: between 2 percent and 3 percent. We called those numbers “staid” and stated that there was a low likelihood of “mass overpricing” in the next 12 months. Per numbers released in late October by the S&P CoreLogic Case-Shiller Indices, the San Diego market is on schedule for an annual, adjusted appreciation rate of 2.5 percent, continuing the slow, steady growth trending in May and staying well outside the parameters of that troublesome “monster growth” by any definition.
Note, however, that monthly year-over-year comparisons (2015 vs. 2016) present a slightly different story as some months do show a wider span and are not necessarily adjusted like the CoreLogic/Case-Shiller numbers. Investors should consider evaluating growth by market sector since certain part of the market, such as “upper tier” and luxury homes, are showing some signs of softening while lower tiers continue to heat up.
AFFORDABILITY: When it comes to affordability, our second bellwether, segmenting appreciation out becomes even more important for investors. In May, we noted that affordability issues can, over time, cause home values to fall, particularly if homeowners react to a market softening brought on by a lack of affordability by putting their homes on the market en masse in hopes of cashing out while they still can. Analysts considered San Diego a relatively low risk for this at the time despite looming affordability issues. Since the beginning of 2016, “low-tier” homes (under $469,000) in San Diego have appreciated 8.5 percent and “mid-tier” homes (roughly between $469,000 and $662,000) have increased by 6.1 percent in value. Svenja Gudell, Zillow’s chief economist, warned recently that the market will “need to begin seeing a big comeback in inventory (in these tiers)” in order to “rebalance.” Corrections (rebalancing) can lead to market volatility, so investors should continue to monitor their specific sectors to identify in advance how affordability – or lack thereof – is affecting pricing, value and sales and rental trends.
LOWER MEDIAN PRICES: Finally, when it comes to median-home-price comparisons to historic norms, our third indicator, San Diego also continues to read “sound.” In May, median home prices hovered around 19 percent over historic median prices, a far cry from the 75 percent margin the area posted in November 2005 shortly before the housing crash. September median home prices posted at $495,000 for the area, meaning that median home prices are still below 20 percent over historic median levels, so that indicator is still in the “green zone” for most investors.
In May, Think Realty predicted that housing affordability would be the San Diego market’s biggest challenge in 2016, and we had good company. At the beginning of the year, the San Diego Association of Governments (SANDAG) warned that the area had only 4 percent of moderate-income housing units and only 6 percent of low-income housing units needed in the area by 2020. The pace of rising prices in these sectors today indicates that there is still a strong imbalance in favor of sellers in these price ranges. In the upper tiers, we expect the market will likely continue to soften as these homes sit on the market longer and are appreciating far more slowly than their lower-tier counterparts. Affordability is the main issue for and represents a primary opportunity in the San Diego market, but it also could create market volatility in the coming year.
Investors looking to get involved in the San Diego market should seek opportunities in development of low- and mid-tier homes or seize the moment when one arises to snag off-market deals on existing properties that can be rehabbed or renovated, then flipped for a profit or held for long-term rental cash flow.
At the time of our initial analysis, monthly rental rates were hovering just under $2,000 a month, and we predicted they would continue to rise. Average rents in the area have risen more than 8 percent since the start of 2016, and Gudell recently released projections from Zillow indicating that the area is likely to experience another 4.7 percent increase in average rents over 2017. Add to that U.S. Census statistics indicating nearly one in every two residents in San Diego is a renter and you have an area rife with opportunity despite the relatively high expense of procuring rental properties in the area.
At this point in time, San Diego’s real estate market is still hot, and still not too hot to handle if investors leverage both education and care.