The Dogs of War
by Jim Scott

2003 So Far

By any standard 2002 was a banner year for investment and residential real estate in San Diego. Everything turned up rosy if you owned something; rents increased, interest rates declined to historical lows and prices increased about twenty percent. 2002 was nothing more than a continuation of 2000 and 2001, the inevitable reaction to the brutal real recession of the early to mid 90s'.

But what goes up must come down. Expansions and contractions in markets are the natural consequence of free markets. Many newcomers to the party believe the wizardry of Alan Greenspan and budget surpluses have ushered in a new era of prosperity without the pain of inevitable business cycles. Our local real estate market will not be excused from a correction no matter how wonderful a place San Diego happens to be. The real question to ask is not when a recession arrives in real estate, but how bad will it be and how long will it last?

On a national scale, the economy is limping along frozen by the twin specters of war and higher interest rates. Pessimism about the future is the stepchild of these uncertain times. Real estate abhors uncertainty. Which brings me to 2003 in general and San Diego real estate in particular. None of the above seems to apply to our golden corner thus far. Thus far I have observed no lessening of demand for real estate of all kinds in these environs in spite of a bit of gloom in the air. It doesn't seem to matter that a substantial portion of the County's male adult population is spending the Spring in the Middle East. Why demand remains so positive has more to do with an attitude shift rather than the hard facts of life.

Residence as Commodity

Convention wisdom held that real estate is a long-term investment and that market timing is something for other kinds of markets. That was accepted as truth before 1973. After the oil crisis that year, Americans met inflation whose cause was rooted in Vietnam and the Arab-Israeli wars. The result was that residential real estate became more of a commodity and less of a utility. Houses were not just shelter and security-now they became vehicles to obtain wealth. House as commodity added volatility to a formerly staid marketplace. All of a sudden market timing became important.

The Market Value of Trust

This is not your parent's way. In their day people bought one piece of property, lived in it and paid it off. You kept money in the bank and, if you were really bold, bought some AT&T. That was the post depression way to do things and fiscal prudence reigned. Then came real estate as commodity. Main Street met Wall Street.

The stock market's fall from grace is more than just Enron. Corporate accounting manipulation, dissembling or other malfeasances have added must luster to real estate investments. The next decade will belong more to real assets and than financial assets. What can you trust more-an audited statement from a corporation or your own real estate? Setting aside the trust issue, where do you make more money?

The Dogs of War

All of this brings me to my point. Real estate is probably the best financial hedge, assuming all of the worst-case scenarios occur, because of the looming war with Iraq. You know the ones; record oil prices (already here), war (expected soon), inflation (right around the corner) and high interest rates (don't look for a tax increase to pay for this war). And throw in a good local recession for extra measure. No assets will be immune from these problems. Well-located real estate will fare the best. The economy in homes will be turbulent but not the disaster of 1991-97. Real estate will outperform both the Street and your mattress.

Commercial real estate may not perform as well as homes, mobile home parks or apartments. If you own commercial products, this may be a good time to take profits.

No one really knows what can happen if Iraq is invaded. It could be replay of either Vietnam or the Gulf War. I suspect it will be one or the other and I am not sure which one. In that lies my own uneasiness about these times. Like all of my fellow citizens, we innately understand that all of us prosper when certainty is king. A protracted and widened conflict will eventually negatively impact San Diego real estate. A Gulf War scenario will hardly cause a ripple in the tidal wave of demand for property in this County.

It Tolls for Thee

Perhaps by the time you read this some resolution will have occurred. I reside tentatively in that middle one-third of the country that is ambivalent about the President's cause. It is not that this group lacks the clarity, patriotism, sense of national purpose or the moral certainty of the hawks and doves. 9/11 changed our world and we have no choice but to engage the dark forces that seek to destroy us. I only want the right thing for this country and my community. In the end, the President has to make that difficult decision as to what he thinks is best. Either course, whether war or peace, will have its costs. All of us will have to pay--I know first hand the expense of a foreign misadventure. What happens to our real estate market is really insignificant as we learn our way in the post-9/11 world.

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.