Market Report: August 2005

Town Envy by Jim Scott

When going on vacation I generally fall prey to the busman’s holiday. After visiting Washington D.C., Manhattan and Southern Florida I came away with several conclusions. First, many people seem to want to move to San Diego. Perhaps this desire is based more on myth than reality but the wish to relocate here is widespread especially among young adults. All prospective new residents always spoke of two attributes of this city; the weather and housing prices.  Second, those markets noted above have the same housing problems as we do, short supplies and high prices.

Here are some snippets from a recent The Miami Herald front-page story, “Sticker Shock”. Here is an interesting quote, “Is the price of paradise too high for South Florida’s labor force? A growing number of employers, recruiters and workers striving to buy homes say the answer is yes—illustrating what could become the region’s biggest economic development headache in years to come.” It seems clear the recent real estate boom in our hamlet is not confined to our weather blessed community. Housing is expensive and in short supply in all metropolitan areas, save the Detroits of America. This will provide some cushion in the event of a major economic calamity.

We need to disabuse ourselves of the notion that our market is undisciplined and in need of a correction because it is really no different than other coastal metropolitan areas. This should give comfort and argue for a ‘soft landing’ when the inevitable correction occurs. The fact that markets are distorted in most population centers will give pause to actions taken by the Federal Reserve Board and other political entities. It is always easy to punish a region guilty of economic gluttony. It is way more difficult to take on the nation’s coastal cities.

Our marvelous economic engine has responded to this situation by creating places like Riverside, Bakersfield and Las Vegas. Bakersfield? Last year the growth rate in that Valley town was thirty percent. People will flow to these areas for housing as long as jobs are being created as well. We are by national character pioneers, even if it is over 100 degrees in Las Vegas this time of year. Our social safety valve comes at a price.

Cities can become havens, like Manhattan, for only the rich and poor. Right now we have collectively decided it is all right to ship portions of the middle class off to other cities. That is fine in the short run but there are major long-term penalties. With those groups go knowledge, energy and parts of our collective future. Over time we cannot afford to socially mirror Manhattan; there is only room for one of those cities. A world center can only accrue to one place.

We need to have housing for those aspirants I met on my trip. If they come they will help grow our economy and create the impetus for jobs and community wealth. The good news is that other areas are nearly as expensive as ours or more so. Other cities are also experiencing business difficulties that arise from extreme housing appreciation. So forget the notion that our prices are driving away business and talent.

The Bad and Uglier

It is impossible to avoid the series of front-page stories regarding the downturn in our housing market. (The New York Times last month proclaimed Denver as the first major city to have a housing recession) San Diego’s year-over-year appreciation is now about six percent. This is proclaimed as evidence of a dramatic change in the housing market. Does any of this really matter? All markets go through cycles and six percent is just fine with me and will assist the long-term economic health of the region. Six percent does not portend disaster. The market has long prepared for this event and there is no panic in the air. In 1991 people lost their nerve and threw property away when buyers disappeared.  In 1991 there was a collective belief values would only depreciate and there was no future. Four ugly years were driven by a lack of faith in the business cycle.

I know cheap money is probably the wobbliest leg of the stool. The other two legs, population growth and jobs, appear to be solid for the moment. Until the Fed and the bond market decide to reprice money, the stool should remain upright. Because real estate is a leveraged investment with real utility, all of us will prosper with six percent.

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