Some Mid-year Thoughts
by Jim Scott

The San Diego urban real estate market this year appears to be a rerun of 2001 without the September drama. So far there have been no real surprises. Inventory and prices are behaving exactly the same as they have since 1997 when this bull market began. Nothing is ever exactly the same and this year features some new wrinkles that make the 2002 residential market unique and perhaps more treacherous. The market can be best described as spotty; some market sectors are comatose and others extraordinarily robust. But first the bad news.

Things That Worry Me, Part II

Cheap money continues to fuel this particular cycle. As the rest of the nation's economy appears to be unable to gain sustained traction, San Diego is continuing to enjoy the best of all worlds. Low inflation and low interest rates cannot be sustained indefinitely. The former exists for a variety of reasons; foremost of which is the fact the remainder of the country is still in a mild recession. The latter is courtesy of the Federal Reserve Board.

It should be noted that I was one of those guys who thought the NASDAQ had some room to run back in the spring of 2000. Predicting the end of that particular cycle should have been obvious but greed kept most of us in the game until it was too late. Interest rates have the potential to be the Achilles Heel of this market. Since it appears the nation is beginning to emerge from the recession, it stands to reason Mr. Greenspan will be taking away the punchbowl soon.

The Best and the Brightest

I am amazed at the continuing strength of the bottom part of the real estate market. The demand for entry-level homes and condominiums has never been stronger. There is a larger change in buying habits in this sub-$500,000 marketplace. Neighborhoods are becoming secondary to price and value. Buyers are asking me for properties in neighborhoods that used to require a flak vest. Buyers working in these environs are urban pioneers betting on a continuing urban renaissance. They have found charming homes, with enough space, close to downtown at affordable prices. They are placing smart bets as the appreciation rates in these formerly ignored neighborhoods are outstripping gold coast properties and probably will do so over the next few years. Rents have gone up so rapidly over the past three years that house payments in this segment are not that much more than paying the landlord. This is best illustrated by the high vacancy rate for urban apartments over $1,000 per month and the lethargic home rental market.

What can impact this market is a change in loan underwriting standards. Not only are rates very low, but also banks are packaging loans with minimum or no down payments. As long as values stay even, borrowers and lenders will be fine. But if prices plummet, as happened a few years ago, there will be trouble in River City.

The Other Side of the Tracks

The market segment of higher priced homes seemed absolutely moribund these days. Buyers at these levels are being particularly choosy. Make no mistake; there are plenty of buyers for homes over $500,000 in the urban markets. What is different this year is their behavior. The last burst of free spending happened in the heady days of the post 9/11 bounce. Once those higher-priced homes closed escrow in January, the market shifted to neutral and has been coasting since. In fact, prices have ebbed monthly since the January peak.
This trend will eventually reverse but not before the gap between the top and bottom of the residential market closes. Perhaps it is because of the reverse wealth effect of the stock market, but for whatever reason sanity has returned to part of the market. But if Qualcomm goes back to 200, all bets are off.

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.