Mid-Year Notes
by Jim Scott

The first half of 2001 is now behind us. Buoyed by a series of interest rate cuts by the Federal Reserve Board, real estate outperformed most other investment vehicles in 2001. This happened even though the national and local economies slipped into a mild recession. There is more than enough economic anxiety floating around to satisfy even the most hardened pessimist. Warning signs abound. But is there really trouble in River City? Why has real estate fared so well in the face of sagging local and national economies? Are we in for a price pratfall later this year?

The Envelope Please

Prices rose moderately for the first part of the year in spite of higher than normal inventories. Traditional lower inventory levels and escalating prices predominated in the early months of the year. Inventories then rose high than normal in late Spring moderating any further price increases. Homes appreciated at a slightly lesser pace than last year's fourteen to fifteen percent. What is troublesome about this scenario are two items. First, by mid-April inventories reached levels not seen since the last recession. Second, five interest rate cuts by the Federal Reserve Board have driven down fixed rate loans about 1.5% since the rate peak of May 2000. The latter should have affected the former but did not. In other words, considering the easy money policy of the Fed, the market should have performed better. The declining rate of sales is generally a precursor to a period of price corrections.

Over in the investment arena, owners and sellers have been in high clover. No price seems to high for eager investors, who have been busy snapping up apartments. Perhaps they know something homebuyers do not. Investors are far more concerned about the future health of the local economy. The quality of their investment is completely dependent on two factors; jobs and new apartment construction. They are betting on escalating rents and therefore values. When we have a feeding frenzy of this magnitude, the expectation is that the region's economic health is sound and can only get better over the near term.

It could be argued that the boom in investment real estate and the cooling off of the home market was brought to you by the friendly folks over at the NASDAQ. People who buy houses own stocks and those who rent generally do not. I know how hard it was to interest people in apartments when Qualcomm was approaching 200. I suspect something additional, and more fundamental, is going on.

Who's In Charge Here?

Investors think they have glimpsed the future of San Diego. They see housing scarcity and little new competition. It is very analogous to the current energy crisis. Californians opposed the construction of new power generating plants and then turned around and privatized the existing regulated ones. The resulting lack of competition….well you know the rest of the story. If you own an apartment building you too can be like Duke Power. Just as consumers have a thirst for plenty of energy, many citizens of this country would really like to live here. And thus far we have created enough jobs to enable that desire.

In the past the lack of a diverse and growing job base kept wages low and unemployment high. That is all behind us. As we mature economically, our systems of managing housing seems hopelessly mired in another era. I am not advocating any one philosophy on growth, I only seem to sense that what we have just doesn't seem to be working. Nearly one-half of our citizens rent instead of own and many of them can only afford rents by obtaining governmental subsidies. Something is wrong with this picture.

The Rest of the Year

Prospective homeowners should take a lesson from commercial investors. Most of them have owned property in the region for years and understand the economics of scarcity. They have experienced the business cycle and it's effect on real estate. Our body politic, for better or for worse, has created the scarcity. If you are economically able, your best option is to join the party. It is not going to get cheaper. Late summer is always a good time to buy and inventories are high. Interest rates are headed below seven percent.

So cash in that tech portfolio and buy any kind of urban real estate. The best buying opportunities usually occur over the second half of the year. But wait, there's more. Mr. Greenspan is determined to make it more affordable for you. Interest rates should continue their descent for at least another six months.

Is this the top of the market? Of course it is. But does it really matter? Over the short run the answer is yes. Dr. Alan Gin's respected Leading Indicators Index for San Diego has been negative for the past eleven months. There is always a danger of recession. Buyers should focus instead on periods of market softness. Prospective home buyers should learn from experienced purchasers and owners of San Diego real estate.

You can reach Jim Scott at his office, conveniently located in the heart of Mission Hills, at 1111 Fort Stockton Drive. 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. Scott & Quinn features professional property management as well as a sales division with 12 sales associates.