Market Report: February 2005

Some Thoughts on 2005 by Jim Scott

I have been spending time listening to various observers make their predictions for the housing market this year. There seems to be a general consensus that 2005 will bring a good but not spectacular year to real estate. Appreciation rates will be around five to seven percent and interest rates will be higher but not substantially so.  In other words, there will be no bubble bursting, no real estate disaster. Given what we know, are these predictions wishful thinking?  Probably not, the sky will not fall on us.

Interest Rates

Interest rates will go up. The war has cost the treasury 200 billion thus far and there is no end in sight. All of us are heartened by the Iraqi’s courage in going to the polls in great numbers. But to those in the know, the heavy lifting is still to come and in the end it is America that will have to pay for this great social experiment. George Bush has been unwittingly cast in the role of Florence Nightingale, saving the world one country at a time. While I applaud the thought, I also know it will be very expensive in dollars. Americans are reformers at heart and are surprisingly willing to bear the required price. The cost in American lives is another topic which transcends pocketbook issues. We seem clear about our moral authority when spending money and less so when lives are lost. Still I see the forces arrayed against the war gaining little political traction. Interest rate movement will be the natural result of this.

If the body politic embraces the ideals set forth in the recent State of the Union address, it will have to impact real estate--there is no free lunch. Low interest rates are the mother’s milk of price gains and a rich real estate market. The budget imbalance and trade issues are starting to get attention in Congress. Already the administration is signaling that it will take another look at the deficit issue. This is a marked change from the post election rhetoric. The deficit hawks with the administration are gaining political muscle and this will be beneficial in the long run for housing.

So far in 2005 I sense the customers have not lost their appetite for real estate. I look back on January, a month truncated by rain, and I see a fairly decent month. Velocity, my holy grail, is still lagging. Somehow I have to take shelter in the lack of true selling days. When it rains no one shops. I only hope February will improve.  If the numbers are not better in February, ordinarily the bell weather for the year, prices could dip by the fall.

Jobs and Demand

Jobs remain more a factor than rates. If people stay employed, even recent buyers who purchased homes with no down payment will survive. There should be no repeat of the 1991-1995 bloodbath. Real estate is our community sport and there is a deep-seated belief that it is good to own property, no matter the immediate circumstance. People such as myself spend much time peering at murky tealeaves trying to figure out the market. I think I owe clients the best advice possible—and that is unfortunately or fortunately based my reading of the vital signs. That reading is sharply influenced by my own experience of three recessions that both my clients and I have experienced.

Perhaps experienced eyes are the worst in this time. Each period is different and the more I observe events the more I have to question the value of the past cycles. My own professional training as an historian has to be questioned. The differences in each business cycle perhaps suggest there is no real safety in clinging to history. To put this another way, I am always amazed by the bedrock faith in owning real estate. No matter the temporary circumstance, someone always wants to own real estate.

San Diego continues to be some sort of job machine. In the past we have not had such luxury. We were slaves to Robert McNamara and General Dynamics. Congress sneezed and we caught the flu. San Diego has in some Darwinian fashion reinvented itself. San Diego Federal goes in the tank and we move on. Our community solution is simple; create many small nimble companies that lack the capacity to sink the ship. The diversity of our economy is at once scary and reassuring. If I go out of business, it will not be noticed. The city seems to attract and embrace small players whose fortunes are based on more than appreciating land.

The above does not mean I have my concerns going forward. I often feel like an arbitrator in the midst of a melee. I need to step back to get a better view. What I see is more demand than supply. I also see a continuing lack of any political will to address the issue of density. The resistance to change within San Diego means housing shortages will be a fact of life for our immediate future.

This is the first month of trying to post this article on line on our new website. I would appreciate you letting me know if you read the article after first seeing the ad promoting this piece in the Presidio Sentinel.

Read Jim's back articles at www.sqre.com or call him for selected back issues, 619 920 9511.
I welcome your comments; my email address is jimscott@sqre.com. You can reach Jim Scott at his office, conveniently located in the heart of Mission Hills, at 1111 Fort Stockton Drive. Founded in 1982, Scott & Quinn is the oldest full service real estate firm in Mission Hills and is still locally owned and operated. Jim has been a homeowner in Mission Hills since 1976. He is married and has two boys. He can be reached at 296-9511, extension 100. Scott & Quinn features professional property management as well as 15 sales associates. Click here to see Jim's past Market Reports. You can also download Jim's 26 page research paper on San Diego County apartments.

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