 Market Report: July 2006
Dear Friends:
I know I owe you Part II of my affordable housing series, but this
month I wanted to discuss the current market. I will resume the series
next month. Any speaking of the market...
--Jim
2006 or How I Learned to Love Collateral Damage
The ship has sprung a few leaks but is not sinking. Prices and sales have
been dismal during the first six months of the year. Last February and
early March it seemed like good times were back but the window of
opportunity slammed shut by Saint Patrick's Day. There is little reason
to believe this erratic market will significantly improve over the next
six to twelve months.
I remember in the dark days of
1982 reading the relentless tide of bleak stories on real estate. Then
I blinked and it was 1986 and prices started up on a four-year binge.
It is easy to get lost in the fog of information that, however
accurate, may not really say anything at all. Everyone, including this
writer, loves his or her numbers. They represent a language that the
media and their readership understand. But merely acknowledging the
waypoints along the ordinary business cycle sheds little light. The
real question is how long this malaise will be with us and what factors
are driving the downturn--or more importantly what can anyone do about
it.
The Fed has decided that housing will have to walk the
point in the fight against inflation. Rising real estate values have
created a huge pile of actual or potential disposal cash. Along with
the attendant economic hubris, this undisciplined mountain of money has
been, according to Fedspeak, a major culprit behind the latest
inflation numbers.
Therefore if follows that there is
nothing wrong with the economic fundamentals of our market. The Board
needs to protect our overseas and domestic lenders first. Reducing the
demand for credit, goods and services serves notice to our enormous
creditor clientele that their loans to us are safe; this will provide
plenty of future credit to pay for wars, second homes and expensive
foreign cars. Real estate lead the fight against inflation until the
annual rate goes down to about two percent.
What is
worrisome is that the Fed, or the government for that matter, has so
little room for maneuver. Consider that for over two years they have
slowly and inexorably raised interest rates and in fact have signaled
that more are coming. Inflation has not been so easily corralled this
time around because of two newer factors; the growth of emerging
markets (China and India are just two of those) and the price of oil.
Since wages for most Americans have been flat or in decline for the
past ten years, the only real source of inflationary profligacy can be
found in higher after-tax income of the wealthiest Americans, cheap
credit and in bloated real estate equities.
Since you
can only wear one Rolex at a time, real estate prices and development
became of primary interest to the Fed. The stated policy of the Board
to is to gradually reduce the aggregate value of residential real
estate, and the amount of development, on a national basis by
increasing the cost of money. Thus far the policy, at least regarding
San Diego real estate, has been a smashing success. Inflation, on the
other hand, has proven to be a bit tougher nut to crack, which leads us
back to China and oil. The latter problem could lead to stagflation,
last seen in 1973, but that is another subject.
Matters
will improve when inflation ratchets down to the Fed's target of two
percent. We live on credit and our foreign and domestic lenders need to
assured their loaned dollars come back in one piece. Money, like oil,
is just another commodity and its price is reflective of demand.
Expanding economies are bidding for barrels and credit; this is
globalization at work; scarce goods and services are routed to the high
bidder regardless of borders. Once inflation is tamed the Fed will
again let us spike the punch.
The collateral damage from
this comes in the form of foreclosures. Owners who have too much
creative financing or bought in 2004 and 2005 are the most vulnerable
and many of them will get hurt or already have been. Most of us will
sail through this squall untouched but for those on the bubble, they
need the two percent solution.
The Doctor at the Fed
knows the patient needs a bit more cure. In the meantime, real estate
commerce soldiers on albeit with lower prices and fewer sales. The San
Diego market will not improve because there is only one San Diego or
because your house is special. Sellers who misread the market and
missed the brief opportunity last spring need to cut their price and
get ahead of this market as there is more downside risk at this time.
If you are a buyer, you should be all in before the spring of 2007.
Concerts in the Park
SQRE
is the proud sponsor of the Mission Hills Concert in the Park series.
The concerts are held in July and August on seven consecutive Fridays.
They are free to the public and last from 6:00-8:00 pm at Mission Hills
Park which is located at 1425 Washington Place, next to Grant
Elementary.
2006 13th Annual Concerts in the Park Schedule
July 7: The Ballad Mongers (Classic Rock 'n' Roll)
July 14 : Dr. Elvis & The Immortals (Rock 'n' Roll)
July 21: Ashley Matte (Alternative Rock)
July 28: The 9 Volts (Rock 'n' Roll)
August 4 : Zydeco Blues Patrol (Cajun)
August 11: The M-80s (80s Dance Music)
Click here to see Jim's past Market Reports. You can also download Jim's 26 page research paper on San Diego County apartments. > Send me complementary, custom MLS listings
> Contact Jim Scott for more information or with comments at jimscott@sqre.com |
