By now you are likely familiar with the recurring theme of newspaper headlines, “San Diego median home breaks record … breaks another record … home values continue to climb…” The headlines are ripped from local news sources like La Jolla Light and the Voice of San Diego, television, like Fox5, and regional heavyweight, the San Diego Union-Tribune. Every news publication, investigator, and blogger has written about the booming San Diego real estate market. However, with all of this positive press, you are probably concerned about a potential bubble or wondering when the real estate market rage will end.
While prices did cool a bit in July and August; prices dropped to $537,750 in July and fell a few thousand further to $535,000 in August. The gradual decrease in prices indicates that the housing market is cooling off but not crashing. An economic bubble (a.k.a. asset or speculative bubble) is a price range that substantially exceeds the inherent value of the item so priced. Meaning, that people are spending way more money to acquire real estate than the inherent value of the real estate justifies. While the San Diego real estate market is expensive, it hasn’t reached “bubble” like extremes. Bubbles are typified by two factors: prices are exceptionally high, and investors are too optimistic, to the point of euphoria.
The reason some analysts are concerned that San Diego county is experiencing another real estate bubble is that San Diego (along with the rest of California) has seen real estate prices skyrocket in the past few years. Rapidly increasing prices is a significant indicator that a bubble is forming. However, unlike other economic bubbles, the San Diego real estate market is cooling on its own. Additionally, San Diego’s real estate supply crunch is due to a variety of factors, not just that people are trying to acquire homes, but also because supply is short, regulations stifle new development, and community groups often intervene to stop proposed developments. Therefore, it is likely that the rapid increase in price has more to do with the reduction of supply rather than a sudden boom in demand (which would indicate a bubble).
For example, from 2001 to 2005, the San Diego market experienced classic bubble factors. Prices increased 63 percent faster than income and rents and, at the peak, prices were 73 percent above the historical average. As you can see, prices were far above income and rents. Conversely, today, rents are increasing just as rapidly as home prices. Moreover, incomes (while not keeping pace) are also increasing. According to an analysis by the Voice of San Diego, home prices would have to increase another 18 percent in excess of rent and incomes before it reached bubble-like qualities.
Thus, the San Diego area is likely not undergoing a real estate bubble and may instead see a gradual reduction in price over the course of the year (assuming efforts to increase supply are successful). You may notice that real estate prices in Del Mar, Ocean Beach, North Park, and La Jolla have all experienced rapid increases in prices. Each of these neighborhoods are also well-developed with vocal community groups to voice their concerns.
It is also important to keep in mind that, while prices are breaking records, they aren’t breaking records at the same pace as the last bubble which saw significant increases over the course of a few years. That means the Fall is a great opportunity to take advantage of this cooling of the San Diego real estate market. The California Legislature passed a bundle of bills designed to increase the housing supply which, in theory, should reduce housing costs. While there is no way to know for sure, it is possible that the cooling in prices is due to investors pulling back on buying in reaction to the bills and perceived drop in prices. That means now is the time to take advantage of the drop-in prices. Home prices in Ocean Beach, La Jolla, Del Mar, Golden Hill, and other nice neighborhoods are unlikely to become “cheap”, but you can find a gem for a good price if you’re looking.
Steele San Diego Homes was founded to connect families with their dream homes. The real estate agents of Steele San Diego Homes experienced the problems with the real estate market firsthand, lack of transparency, confusion on pricing, and consumer misunderstandings; all contributed to their first house being a total bust. They now devote their professional lives to ensuring that every customer is satisfied, understands the process, and walks away informed and better able to handle the real estate market.
Are you interested in connecting with local San Diego real estate professionals to help you make sense of the San Diego market? The San Diego realtors at Steele San Diego homes can help you. Whether you're selling your single family home or looking to purchase a high-rise condominium in Downtown San Diego - we can help.