Market Report: September 2005

Globalization and Housing Prices, Part I by Jim Scott

Richard Sinkin lives in Mission Hills and is a Partner of InterAmerican Group. Mr. Sinkin’s company buys small to medium American companies that can benefit from manufacturing their product abroad, primarily in Latin America. This writer has long been concerned that job outsourcing may eventually erode the value of American real estate. The complete interview will be available on my website and will be presented in this periodical in three installments. Part I follows.

JS: Will globalization eventually drive down home prices and rents because our community aggregate income will go down as a result of globalization? As we lose good jobs to lower wage countries….

RS: No, wrong analogy, wrong process. The reality is, the more San Diego integrates into the global economy the more we will create jobs. We still have a strong manufacturing base here but mainly very small companies, mainly service companies. Those jobs are not going to leave here; they can’t because their customers are all here so it doesn’t make a lot of sense. But we are creating a significant cadre of high paying jobs with companies that are technology based and globally focused. Many of these are spin-offs of the universities and this is a theme that I harp on all the time. There is a direct connection between investment and education and the creation of jobs in the communities. And San Diego is unique in that wages here are relatively low by comparison to other places with this kind of economic growth. We have very low unemployment; we are below the national average, below the state average. And the reason is because we have such high demand to live here. And so people are willing to take a job that is not as high paying because they want to be in San Diego.

JS: Are you saying that San Diego is going to be a globalization winner and other cities are going to be net losers?  Are red states, the fly-over states, going to lose ground to San Diego going forward?

RS: Exactly. The winners and losers are going to be parceled out depending on whether communities get into the globalization game or not. To the degree they don’t, they’ll lose.

JS: That’s a good point. What non-coastal areas will prosper with globalization?

RS: Chicago’s a big winner, huge winner. There are other places as well that are coming on strong because they are playing the globalization game. They figured it out. They understand this is a force that is not really stoppable, barring some massive catastrophe, World War, something like that. But assuming we continue on the trajectory we are on for the next 40 to 50 years there will be increasing integration of the global economy and to the degree that you participate in that integration, you create high value jobs, you create opportunities, you create new markets for products - you win. To the degree you don’t, you get squeezed down by the fact that you’re just not providing a service or a product that the global economy wants.

JS: I guess my concern and the concern of my client base and some of my readers is that the wages will be eroded and therefore rents will go down, resale prices will go down and everybody will find themselves like the citizens of Flint, Michigan, where I might have bought a house there 20 years ago and the value is probably less than the mortgage. GM left Flint but what is stopping Qualcomm from leaving San Diego?

RS: Old economy and no leadership created Flint. It takes real community leadership to figure this out and to the degree that community leaders are focused on the really important things like where we are in the global economy is a degree to which these communities will win. You’re absolutely right. You know if you bought a house 10 years ago in San Diego, almost no matter where you were, you were a winner because this community, almost in spite itself, has become a global player. We’re looking at companies here that are largely spin-offs of the universities and the academic world who are commercializing their ideas, attacking new markets, putting new products out there that people want.

JS: It seems you are saying that community leadership will have a greater impact on long-term real estate prices than other factors such as interest rates. How good is our leadership cadre and how well are they really doing in comparison to other cities and regions? How would you rate our performance on a scale of 1 to 10?

RS: I think it’s a really good question. Our company functions throughout the United States and most of our consulting clients are from the Midwest. We have investors everywhere. So we do get sort of a national perspective for this and I would say that San Diego in the leadership front is, for a major city like this, pretty bad. It really is. We don’t have the political leadership that is deeply engaged in issues of globalization. It’s really more a matter of financial survival for the city. And I would say the leadership is on a 2-3 level. It’s pretty low. Our regional performance is in the 6-7 range.

JS: Is that because of our geography and the universities?

RS: Exactly, that’s why. We have natural and educational resources that are producing for us.

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