When it comes to real estate, sometimes it’s easy to become fixated on the details of the current news. It doesn’t help that news reports are often carry exaggerated headlines that are created to sell more papers and more advertisements. We forget that news reports are generally reactive rather than proactive. It’s very easy to buy into the herd mentality, and get over-elated in the good times and stricken with fear and anxiety in the bad times. But there are always good times and bad times, especially in the real estate markets. The San Diego real estate market is no exception.
Experienced real estate investors and savvy home buyers have always known that real estate moves in cycles. There are ups and downs in the real estate markets, just like in the stock market or any other. In the long run, home values appreciate at about 4.5% annually. But unlike most stock investors, most home buyers enjoy much greater returns due to the fact that most home purchases are highly leveraged investments. Very few people pay in cash. So if a home buyer puts a 20% down payment on a house that costs $100,000, and the house appreciates by 4.5%, then the return on the initial investment is 4.5% x $100,000 = $4,500 / $20,000 = 22.5%. The percentages are the same for any purchase price. And unlike stock purchases, home owners also enjoy the benefits of living in their investments. You can’t live, eat, and sleep in a stock certificate. Buying a home will always be a great investment in the long term.
But when it comes to choosing the best time to buy or sell a home, clearly some times are better than others. Putting the numbers aside, one of the best ways to determine when to buy or sell real estate is to look at the stage of the market cycle. Intuition alone can be an excellent indicator. Here is a graph that shows the typical real estate investment cycle:
In San Diego, the last really down real estate market was in the early 1990’s when there were problems with the economy, military base closings, and lots of unemployment. Many owners of San Diego homes lost their jobs and had difficulty selling their properties. There was real despondency and depression in 1992 and 1993. During the mid-to-late 1990’s the economy diversified and there was a return to hope and optimism. By 2000 homes in San Diego CA were selling at a rapid clip and excitement was building. People started making serious returns on their real estate investments. Banks started giving 100% financing to just about anyone who wanted to buy a home in San Diego. By 2005 the San Diego housing market had become euphoric, and it seemed like the good times would never end. Even the most sophisticated real estate investors and home buyers seemed to forget that real estate moves in cycles.
San Diego was one of the first real estate markets to move back into a down cycle. In 2005 and 2006 prices started coming down, but there was general denial that the good times were coming to an end. By 2007 genuine fear had set in. Home buyers and investors stopped buying homes. The local real estate market ground to a halt. The fear turned into panic and thousands of home owners just walked away from their properties, and the foreclosure mess began.
It’s been about two years now, and the panic has subsided to a large degree. House foreclosures and short-sales are still in the works and there is general despondency in a large segment of the population. But we have a new President, and new policies aimed at pulling the country out of a depression. This will probably take time. There are no quick fixes to a bad macro-economic situation.
But where does this leave the San Diego real estate market? Home buyers and investors are again competing for a limited supply of homes. The inventory of homes for sale in San Diego County has dropped to about 8,000 homes, down from around 20,000 in late 2007. At the current sales pace, there is less than a six-month supply of homes for sale, and a 6-month supply is considered a “normal” or “healthy” housing market. Is this a cause for hope? Drop us a comment and let us know what you think.