Is The Other Shoe About to Drop?
by Jim Scott

Seventeen-point-three. Another good year has passed for San Diego residential real estate. 2003 was not nearly as stellar a year as 2001 and 2002, but seventeen percent is nothing to cry about. Going forward I see less of the same. Jerry Brown once said, "Less is more" and another moderate year will benefit all of us in the long run. Moderate appreciation gains are the best way to avoid the periodic nasty crashes. Nothing would be better than a good ten percent year in 2004. It is too early to call for 2004.

San Diego Grows Up, Part II

I have written often in this space that our urban market is maturing and will soon look more like Philadelphia than Peoria. Because of the price of close-in land, multi-family home ownership will become socially accepted as entry level housing. Gradually new buyers, and others for that matter, are accepting the notion that there is no new Allied Gardens in their immediate future. Affordability becomes a new political mantra but there are no solutions on the table. The urban entry-level single-family dwelling is in the ER and the prognosis is poor. Buyers who once dismissed condominum living now by necessity eagerly embrace the concept. Just as cheap homes crippled the nascent condominium market thirty ago, expensive mid-level homes are now fueling the bull market in attached homes. Look at the neighborhoods that had the biggest gains in 2003-Logan Heights, National City and other low priced areas. The dogs in 2003? Look no further than Del Mar and Rancho Santa Fe. Condominium appreciation, long the wannabe in the housing market, continued to reward owners of attached homes in the under $500,000 bracket.

The Myth of Affordability

To try and understand the post-com dot slide in expensive homes is really looking in the wrong place. The real story is the strength of the bottom of the market. The sub five percent appreciation rates in Rancho Santa Fe mean little. That market was due to cool off. Just because Logan Heights had a banner year does not mean there is a crash coming at the top of the market. Five percent price gains in those wealthy coastal enclaves is still a respectable number given price moves over the past five years.

The metro market, our main interest, is somewhere in the middle of this story. The urban market is still affordable as long as interest rates stay relatively low-along with buyer's expectations. All buyers come to me with their wish list and price point. You can generally add $200,000 to their maximum price and find a home to meet their expectations. Eventually dreams are forgotten and real estate is bought and sold.

It may seem foolish to argue that $350,000 for a converted apartment in Hillcrest in affordable. But it is when you compare after-tax cost and rents, it still makes good economic sense. Judging from the strength of the sub-$400,000 market, most enabled buyers think that too.

Can Anything Be Done?

I know that less than twenty percent of the population in the county can purchase the median-priced home. Commission after commissions have studied the housing problems and no solution is in sight. There are culprits galore but a paucity of solutions. It is a social problem that needs attention. Home ownership is a huge component of our societal glue. Any social organization functions the best when all have a stake in the mutual enterprise.

There is only one real stopgap solution to the problem and the private sector is running hard with the ball. Converting older apartments into condominiums is a public-private enterprise that has met with much success. I am tired of reading stories about how land prices, government regulations and developer greed have conspired create a class of permanent renters. Fine, but what is the solution?

The conversion game has succeeded largely because the City has allowed it to. Unfortunately there are those with influence who want to slow down the process. Their argument is compelling to be sure-rents will rise and renters will be forced out as apartments are converted to condominiums. We can crush this market overnight with a few new development rules. The body politic needs to make a decision. What is better social policy? The American dream has been and always will be about climbing from the bottom to the middle. That is what has made the Great Experiment work.

Here is where I bring out the dreaded "D" word. Density. That is the only practical solution. I still see little political will to delve into those dangerous waters. Density is the third rail of local land use politics and the Council knows this.

Density means fair rents and it is good social policy. It means allowing people to climb into the middle class when they purchase an older converted condominium. It makes for efficient public transportation and revitalizes older commercial zones. Is San Francisco such a bad place?

Remember the wise words of Pogo, "I have met the enemy and he is us."

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.