March Madness
by Jim Scott
1999 was a banner year for real estate in the 92103 market. Prices increased about 25 to 30 percent and if you were fortunate to own property in San Diego, your net worth was enriched. 2000 started off as a repeat of 1999-upward pressure on prices early in the year caused by low inventories. Buyers scrambled for homes and bid up prices to record levels. March Madness does not just apply to college basketball. Are buyers justified in these buying decisions? Certainly the sales of the first three months of this year would suggest an unbridled optimism for the future. Buyers did not flinch at ever-increasing interest rates and prices. Bidding up real estate prices is really a vote of confidence in our individual and collective economic futures.

Clouds on the Horizon

So what is wrong with this picture? Prices and rents seem on an unrelenting course upwards. Alan Greenspan's attempts to quiet the party down have thus far not succeeded. Five interest rate increases over the past year have not dampened our collective enthusiasm for both stocks and real estate. Inflation remains low in spite of recent hikes in the price of fuel and housing. Jobs are plentiful and San Diegans bristle with self confidence. So why am I worried? I am worried because I see so much confidence and not enough perspective. I remember 1989 and 1979 all too well. A bit of worry is a good thing.

Interest Rates

For example, buyers seem oblivious to rising interest rates. There is such confidence in our local and national economies that rates do not seem to dampen their enthusiasm for real estate. It is this very indifference that concerns me.

Higher rates, when engineered by the Federal Reserve Board, are meant to curtail economic excesses. They have had no effect thus far on real estate and only marginal success in the financial markets. Does this mean the Fed is a paper tiger or that their traditional remedies are now working? I suspect it is our own hubris that is subverting the Fed's strategy and not the strategy itself.

There is, however, some point where increasing interest rates will slow down the real estate economy. I think when the basic home loan hits 9.25%, prices will moderate. If rates go over ten, there will be a full-blown real estate recession. I realize that a majority of people and politicians see little need for rate increases and oppose the Fed's actions. Even though the inflation rate remains at historical low levels, the Fed persists in raising rates. Are they trying to tell us something?

Prices

Buyers should take heart in the past. Prices seem to do most of their mischief early in the year. Late winter and spring are always the worst of times for buyers. This year was no exception. In the past, the majority of the annual price increases seems to occur during the first part of the year. Also the Fed has indicated there is only one more increase in rates assuming inflation does not erupt in some sector of the economy. Buyers tend to be most active at the very time sellers are not. Seller's tend to bring their homes to market later in the year. The differing patterns cause the seasonal distortions in the marketplace.

So What Should a Buyer Do?

Buyers should adjust their habits and delay their New Year's resolution to buy a house. It is not that they will get such a better price. The difficult process of buying a home will be far less frustrating. Buyers should go back and revisit properties that have been on the market. Along with being alert to new properties, buyers should look over the wallflowers...there may be a good deal that can be created. I was once told by an old hand in this business that there is no bad real estate, only bad real estate deals. Try and make your own good deal.

2000 in General

Perhaps the buyers are betting right. Other than a collapse in the stock market and interest rates above 9.5%, I see little to dampen pressure on prices and rents in the 92103 zipcode.

Buyers (and ex-renters) are probably acting rationally by locking in housing prices however inflated they may seem. As long as that group has the financial ability to hedge against future housing inflation, this boom will continue into the foreseeable future.

I know it is difficult to see anything that will derail this local economy. Unforeseen world events can impact our local real estate market. Homes are now a globalized commodity so it is imperative to pay attention.

You can reach Jim Scott at his office at 1111 Fort Stockton Drive. Jim’s direct line is 885-9511.  Jim has been a homeowner in Mission Hills since 1976.  Scott & Quinn is the oldest full service real estate company in Mission Hills.  The 12 associates serve the beach and metro areas.  There is also a professional property management team on staff.