San Diego is receiving a great deal of scrutiny these days from experts and economists doing their best to identify the tipping point of a housing bubble as far in advance as possible. The result, unfortunately for investors, is a stew of conflicting opinions that could actually expedite a bust and exacerbate a problem. Fortunately, the Brian Ellis Investing Letter believes that any serious market tremors in San Diego are likely at least 12 months away.
The cold, hard numbers
San Diego real estate is certainly looking good for those who already own property in the area. Sales volumes fell in December on both a monthly and annual basis, but stronger sales earlier in the year kept the long-term outlook strong. Even better, if you’re thinking of putting a property on the market, you’re probably going to get more than you paid for it because home values in the area are rising steadily on a monthly basis and up annually by double digits.
While that type of growth is a solid benefit, it can, according to some experts and a number of “spin doctors,” be a harbinger of a bubble to come. Not so, said San Diego Association of Realtors board president Chris Anderson.
“We are not seeing any monster growth in home prices, which will be a good thing to maintain economic stability in the region,” he explained.
Median home prices hovered just under $540,000 in the San Diego area in November 2015, and general consensus indicates that a home valued at median value as of the end of last year will be worth between 2 percent and 4 percent more in 2016, indicating a distinct lack of the skyrocketing values that tend to precede a real estate bubble.
Where is the Bubble Buzz Coming From
So where is all the “bubble buzz” about San Diego coming from? For starters, one cannot really say the words “California real estate” without at least giving a passing thought to bubble potential. Much of the state is completely outside of the realm of affordability for the average homebuyer on an average national income, and there is no sign that this will change in the near future.
As Zillow chief economist Svenja Gudell explained at a recent panel that addressed, among other things, a potential bubble in San Diego, “A handful of markets … are very hot right now, and it’s possible home values may actually begin to fall somewhat in these places as more residents are priced out amid affordability concerns.”
If prices start falling too quickly and too many homeowners react by throwing their homes on the market to cash out while they can, a bubble scenario certainly does become a possibility. However, during that same panel and a corresponding survey conducted by Zillow and Pulsenomics, about two-thirds of experts asked about a San Diego bubble specifically said that it would not happen in the next five years, if at all. Instead, they cited Miami, Los Angeles, Houston, Seattle and Boston as being in “some danger.”
Overvaluing San Diego Housing
The second component in any real estate bubble involves a significant overvaluing of real estate in a given region. Sticking with San Diego, recall the crash in that area in 2005, when prices fell from $517,500 in November and plummeted over the next four years to $280,000 in January 2009. This bust was precipitated by skyrocketing home prices that could not hold up and by borrowers happily paying those prices despite an inability to pay the mortgages that came with those price tags.
A projected annual 2 percent or 3 percent appreciation rate is, by comparison, quite staid and safe and does not indicate a high likelihood of mass overpricing in the San Diego area in the next 12 months. Furthermore, median home prices in San Diego are, at present, about 19 percent over historic median levels. By comparison, in November 2005, that number was 75 percent, so homes are likely not overvalued enough, if at all, to tip the market in the near future.
Tips to Invest in San Diego Real Estate
So how should investors look to be involved in San Diego real estate? Although wholesaling volumes are down in the area these days (and the media has been saying flipping is “dead” in the region for the past two years), the reality is that San Diego is one of a very few in-demand, high-profile California markets where the deals, such as they are, are still both available and, relatively speaking, affordable to real estate investors without hundreds of millions of dollars in backing.
Will you have to work a little harder to snag an off-market deal in this market than you might in some other metro areas? Certainly. But if you know your costs and are prepared to put in the time to get the property in hand, you can generate some relatively fast cash by fixing and flipping.
With rental rates trending upward with no sign of stopping, more and more investors are opting to buy as low as possible, then fix up to a rental standard and rake in the monthly cash flow and long-term property ownership benefits as well.
Vacancy in the city is low (2.6 percent) and average rents are posting at just under $2,000 a month, according to local and national surveys, so a rental portfolio in San Diego is certainly a viable, attractive option.
Of course, this wouldn’t be a complete market overview without a nod to the Federal Reserve for finally raising interest rates. While many investors believed that this minuscule bump of 0.25 percent would not happen for at least another year, if ever, the Fed decided in late 2015 to take the plunge and finally raise interest rates just barely back above zero.
Chances of a Bubble?
However, if you are a San Diego investor, you can go back to behaving as if nothing happened at all because it will likely take 12 months or longer for any substantial changes in mortgage rates to affect San Diego because of the high demand and low inventory in the area.
While interest rates could potentially rise as high as 4.6 percent by the end of 2016 (we’re hovering just under 4 percent at present), rising home values should enable California buyers to continue buying, selling and financing properties pretty much as usual without any major roadblocks, such as substantially larger down payments or more stringent borrowing requirements.
So is San Diego set to boil over? Not today, and probably not this year. However, from a bird’s-eye perspective, the market is not guaranteed to be steady as the markets around it become increasingly tenuous. As Bryan Ellis, host of Self Directed Investor Radio and a private equity fund manager, noted, “Whether the market shifts into a plateau or something more severe remains to be seen.”
Investors not already involved in this area of the country will need to be light on their feet and ready for action if they want to optimize their chances of turning real estate profits in the long term.
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