Written for Voice of San Diego
Housing Implosion Coming to San Diego
By SANFORD GOODKIN
Voice Guest Columnist
Monday, July 4, 2005
When I was in Nicaragua, I flew over some ancient volcanoes whose tops had blown off, spewing stuff for many miles. San Diego is in the process of acting like a modern volcano. This one will be known as "the housing bubble." No expert can say with certainty when this will happen. However, what will happen is vital to our overall economy, as homes are the main asset of the families that own them. They have become the modern method of saving for the future.
It is well to review my thoughts on what has been propelling San Diego toward the conditions of a potential housing implosion. Some crashes are accidents waiting to happen; the local housing market's condition is no accident.
San Diego has been a hot marketplace because of the long wait between deciding to build homes and receiving the entitlement to legally begin the process of land preparation. This distorts timing and adds significant costs while creating inflation of the product, home or apartment and future land purchases. Housing, like all products, is affected by the basic law of economics: the ratio between the supply of something and the demand for it determines its pricing. The fact is that we have under-built in this region's market for many years and will continue to do so. In a major way, the logical conclusion would be that prices have a "floor" under them, because of constant shortage.
However, the shortage is not across the board. This is important to remember. Rather, the main shortage is in the affordable and workforce housing sectors. These are the homes of teachers, professors, nurses, fire and police protection, computer programmers and other very necessary categories to our health, education and safety. Therefore, teachers and professors have become very difficult to recruit in the city.
There are other facts that cause me to conclude that this marketplace is on a roll towards implosion rather than crashing into a deep hidden pit. I've seen pits before, but this begins to appear like a yawning chasm.
What are the reasons?
There is more true wealth than ever before, and it's loaded with dollars for speculation.
The volatility of the stock market has shifted attention into real estate.
Long-term interest rate mortgages have remained very low despite the Fed's hike in short-term interest rates, and banks have a lot of surplus to lend for purchase or re-financing.
The rise of demand for vacation and retirement housing, so people want to own more than one home or condo.
The major reason is the amount of speculation burdening marketplaces with condos and homes sold to non-users, who are just game-players.
Among hundreds of units on the market are those that were supposed to turn over quickly for a healthy profit. The last four years held true to this expectation. The way the market has been, however, is not the way that it can continue to be. A hot-air balloon cannot keep inflating forever.
This situation is also known as "the greater fool theory," which suggests that there is always a greater fool waiting to pay you a profit on what you've bought, no matter how much you overpaid for it. Remember that the marketplace determines values -- not past statistics. If people feel that they want to buy fast, that the prices will keep inflating and they can locate an affordable mortgage, then those people become the marketplace.
To that end, two unethical practices have distorted our region's marketplace:
1. The minority of realtors and brokers who compete with their customers to inflate what they buy instead of providing honest, trustworthy services on their behalf, and
2. The lenders who engage in highly creative interest-only loans, or adjustable-rate mortgages that are meant to lure clients rather than keep them being exposed to the likelihood of losing their homes as rates increase, which they will.
Both have added to the velocity of an already fast-moving market, further clogging the arteries supplying its life-blood. This ensures that the system is being injured slowly but surely, as if it were cholesterol laying a death-trap for the marketplace. Included in this clogging process are interest-only loans, which have proliferated in the past 18 months.
The implosion will come when the space between the left and right ear, where psychology takes charge, changes. It will happen on a dime when the marketplace becomes convinced that it is happening. This is no longer supply versus demand. It is the extraordinary delusion of the madding crowd.
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