San Diego Real Estate is Not Up-and-Coming

I've been hearing a lot of buzz lately around the idea that the San Diego real estate market is up-and-coming, but I must say that I disagree.  The prices here are inflated as compared to what people can afford.  The median household income in San Diego is $59,477 (http://www.deptofnumbers.com/income/california/san-diego/) which would put an average San Diego family in a position to afford a home that costs $178,431 at the high end (3x income). The median sale price for housing in San Diego is currently almost $400,000 (http://www.trulia.com/real_estate/San_Diego-California/market-trends/), which is more than twice what your typical San Diego family can fork over for their living situation, and this is totally unsustainable.

This is not to mention the shambles that the majority of these properties are in. Owners who can't afford the houses in the first place certainly can't afford upkeep, so they've all been slowly decaying for at least a decade now. Most of the places that I've rented over the years since coming to San Diego in 2006 would need something in the neighborhood of $50k invested just to bring them back to 100% again. They need wiring and plumbing work, some have termite damage, the foundations are sagging, the roofs, siding and windows need to be replaced, and more.  

In that case, these fixer-uppers shouldn't be selling for more than about $130K.   The San Diego real estate market is so out of sync with reality, it's a wonder that the previous crash didn't happen sooner. The only thing driving this uptick is speculation by "investors". Until housing prices go down by about half, or salaries double, this should not be looked upon as a recovery.

If the real-estate market isn't being pumped up from within (by people that live here and can afford to buy), then there are several sources that could cause these inflated prices to persist.  First, many of the people who got into these houses at 2007 prices haven't completed their final death throes into foreclosure or short sale.  It's a lot harder to kick someone out of their house if they stop making payments than just sending a foreclosure notice.  There are lots of rules that either prevent or delay foreclosure in San Diego.  Also, it's in the banks' best interest to take their sweet time on these foreclosures, because when they do finally foreclose, and sell them for what they're worth (not what they sold for during the housing boom), they have to claim those losses on their income statements.  These publicly traded banks, which must report quarterly, and whose quarterly numbers drive stock prices, will see those prices drop at the end of a quarter that they would execute mass foreclosure in.  Since many of the bank executives salaries are dependent upon high stock prices, they won't be in any hurry to do such a thing.  They're hoping that they can hold on to those properties until the market swings back the other way, foreclose on them then, and sell them at their formerly inflated prices.  When these properties finally hit the market, it's not likely that they'll sell at 2007 prices, but at something more in line with what your average family can afford now.

Next in line is the inflationary policies of the Federal Reserve.  When the federal government is paying investment bankers (with negative real interest rates) to borrow money, that money needs to go somewhere so that the bankers can get a return before they need to pay it back.  If they happen to put that money into a REIT (Real Estate Investment Trusts, which pool investor money to buy properties) or directly into properties, the prices artificially rise, creating a bubble.  

Exacerbating this problem is the fact that newly rich foreign investors from places like Southeast Asia and South America are enticed by the increases in U.S. real-estate prices, especially in touristy places like San Diego, so they come in and buy up properties with cash in the hopes of unloading them later at a hefty profit.  These people aren't buying property to live here, they just want to make a quick buck, and can't be counted on to keep prices high.

What this all means in the long run is that supply and demand will eventually win out.  If prices stay up or continue to climb, and the people who live here don't have salaries in line with what it costs to live here, they will just start to leave.  Since the pool of wealthy people in the U.S. is shrinking, it's not likely that people will move in from elsewhere to occupy these vacant spaces.  And without people to rent or buy these properties, the prices will have to come down.  We may not see a catastrophic crash like we did last time property prices started to climb into the stratosphere (or we might), but there will be another correction, and it won't be pretty.