If you are a seller today in San Diego, this article will put a smile on your face. Buyer, not too much. We know that the economy is taking a swing upward generally, and San Diego is such a desirable city. But is it out of reach? Let’s take the city’s real estate temperature.
The S&P Case-Shiller Home Price Index tracks values in many markets. A recent index ranked San Diego 10th in gain when compared to the real estate markets of the 20 cities it focuses on. An annual gain in prices of 10 percent is considered unsustainable, and the top-ranked cities saw gains close to that target as Denver, Dallas and Miami landed at over 8 percent. On the other end of the spectrum, Washington, D.C. and Cleveland did not even reach 2 percent. And where did San Diego come in? The index showed an appreciation of 5.1 percent from January 2014 to January 2015. Healthy, for sure, though not so extreme to be alarming.
The upturn is generally due to a reduction in inventory; foreclosures have been absorbed and new construction remains low, at close to prior recession levels. Interest rates are still low, encouraging buyers to accept those 5 percent increases.
But can this level of appreciation continue? Interest rates are slated to rise this summer, and this may impel buyers to take a step back. With inventory so low – about two and a half months of supply instead of the more customary six months – slightly higher rates should not have a significant effect. After all, if people truly want a home of their own, what choice do they have but to pay the extra freight of a recovering marketplace?
Problems arise in markets where home prices are rising twice as fast as wages. That is where a slight rise in interest rates can have a dampening effect on prices. The leap in prices over wages is exactly the reason experts find appreciation rates of 7 percent or more unsustainable. If the buyers cannot match those increases, it is inevitable that prices of homes will fall.
What is probable is that increases in prices will remain in the 3-5 percent range going forward. Without the added purchasing power higher wages bring, there is a limit to how far and how fast prices can accelerate. It is interesting the brokers now report faster appreciation in some of San Diego’s urban neighborhoods than the formerly popular suburbs.
San Diego’s median price is $440,000, still lower than Los Angeles’ $465,000 (up 9.2 percent) and Orange County’s $590,750 (up 4.2 percent). With the combination of short supply and relatively low interest rates, appreciation in prices is pretty much assured, though hopefully at a slightly slower pace.
Michael Lea, real estate professor at San Diego State University is quoted as saying that the dynamics of “limited supply and miniscule new construction coupled with rising demand” are pushing prices up. But he adds, “We are clearly pushing the limits of affordability.” Nonetheless, we are likely to see rosy cheeks and big smiles on the faces of San Diego’s real estate professionals for the near future.
