San Diego County continues its long recovery from the 2008 recession and financial crisis, even as signals of the next economic recession begin to creep across the market. One of these signals is interest rate action. Fixed rate mortgage (FRM) interest rates are rising steadily in 2018, causing home sales volume to fall back and prices to follow.

Further, residential construction has yet to gain any momentum in San Diego. Thus far, multi-family construction has experienced a quicker recovery than single family residential (SFR) construction. Expect the demand shift from SFRs to rentals to continue, injecting growth into multi-family construction in upcoming years, peaking around 2021-2023.

View the charts below for current activity and forecasts for the San Diego housing market.

Updated December 3, 2018. Original copy posted March 2013.

Home sales volume still low

Chart update 12/03/18

2018 projection* 2017 2016 2003: Peak Year
San Diego County home sales volume 40,800 42,500 43,200 60,800

*first tuesday’s projection is based on monthly sales volume trends, as experienced so far this year.

Home sales volume in San Diego County saw its last significant increase in 2015, which was 12% higher than 2014. This boost was partly due to lower mortgage rates in 2015 and to the area’s relatively swift jobs recovery. Since then, sales volume as continued at a relatively flat-to-down rate.

Today’s flat sales volume can be attributed to end users who have yet to return to the market in significant numbers. Total sales volume in 2016 was just 1% above 2015. Sales volume continued to slow in 2017, following the increase in mortgage rates at the end of 2016. This slowing continued into 2018, with year-to-date home sales volume 4% below a years earlier as of September 2018.

The forecast for home sales volume in the years following 2018 is more of the same. Higher interest rates and economic uncertainty will continue to hold back sales volume in 2019, with volume continuing to decrease well into 2020 when the next recession is forecasted to arrive. After volume and prices bottom in 2020, homebuyers will return in greater numbers to push the housing market to its next boom, expected in 2021-2023.

Turnover rates are up: good for sales

 

Chart update 12/03/18

2017 2016 2015
San Diego County homeowner turnover rate 9.4% 9.0% 7.8%

San Diego County renter turnover rate

23.6% 21.5%
23.0%

The percentage of San Diego County homeowners and renters who moved in 2017 rose over the previous year. This trend is much more promising than most parts of the state, where renter turnover has declined sharply over the past few years. This improvement demonstrates San Diego has more confident and willing homebuyers and renters than most of the state (at least in 2017). However, turnover rates for both owners and renters still remain well below pre-recession levels.

Lower turnover rates are indicative of cash-strapped households that simply cannot afford to move, whether they are homeowners or renters. When turnover is low, home sales volume is hindered.

The turnover rate in San Diego County has not suffered as much compared to the rest of Southern California. This is partly due to a better jobs outlook and San Diego’s large military population, which traditionally experiences high turnover. Agents can gain an “in” with this population by familiarizing themselves with the various benefits available to military renters and homeowners such as Veteran’s Administration (VA)-guaranteed and CalVet mortgages, then advertising themselves as experts.

Related articles:

Servicers must assist underwater military members to relocate

Foreclosure of service members’ property prohibited during nine months after service

Homeownership rebounds from bottom

Chart update 12/03/18

Q3 2018
Q2 2018 Q3 2017
San Diego County homeownership 59.3% 54.7% 54.1%

San Diego County’s homeownership rate followed the general statewide and national trend of decline in the years following the Millennium Boom, bottoming in 2016 at 50.7%. In contrast, homeownership peaked at 63% in 2006 in San Diego County.

The homeownership rate in San Diego County has historically been comparable to the rest of the state, though it is above the statewide average of 55% in Q3 2018. With elevated home prices and the forward movement in mortgage rates continuing in late-2018, the homeownership rate won’t rise significantly until homebuyers return in larger numbers in the years following 2021.

Home prices continue to rise

Chart update 12/03/18

Q3 2018 low-tier annual change Q3 2018 mid-tier annual change Q3 2018 high-tier annual change
San Diego County home pricing index +6% +4% +3%

The price of low-tier housing in San Diego County skyrocketed after the latter half of 2012. 2015 experienced another price increase. This is likely due to the boost given by decreased mortgage rates throughout 2015 and 2016.

Lower mortgage rates free up more of a buyer’s monthly mortgage payment to put towards a bigger principal. Thus, San Diego’s high home prices continued to find fuel from increased buyer purchasing power.

In 2018, home price increases have sharply declined in reaction to slowing sales and rising interest rates, which began in late-2017. The annual pace of increase is now just 3% in the high tier and 6% in the low tier, much lower than in recent years when the annual rise averaged around 10%. As this pace of increase continues, expect home prices to reverse directions in 2019. Falling home prices will continue into 2020, when the economic recession arrives.

Multi-family construction leads the way

Chart update 12/03/18

2017 2016 2015
San Diego County single family residential (SFR) starts 4,100 2,200 3,200

San Diego County multi-family starts

6,400 7,800
6,100

Residential construction starts showed mixed recovery signals in 2017. Thus far the recovery has been concentrated in multi-family starts, due to the increased demand for rental housing experienced during this recovery. Fueling this increased rental demand are:

  • a demand shift from suburban living to city dwelling by the youngest generation of homebuyers, Generation Y (Gen Y);
  • an increased resistance to homeownership following the housing crash; and
  • the higher barriers to homeownership due to the return of mortgage lending fundamentals which tightened mortgage lending.

Today, the general trend for single family residence (SFR) construction starts in San Diego County is up, but still far below 2002-2004 numbers. The next peak in SFR construction starts will likely begin around 2021.  Even then, SFR construction starts are highly unlikely to return to the frenzied mortgage-driven numbers seen during the Millennium Boom.

Jobs recovery leaves other SoCal counties in the dust

Chart update 12/03/18

Sep 2018 Sep 2017 annual change
San Diego County employment 1,479,500 1,452,600 +1.9%

Before end users can provide sufficient support for the housing recovery, they will need to acquire income in the form of jobs and wage increases. San Diego continues to outpace the state’s jobs recovery, which is clearly good news for San Diego’s housing industry.

Unlike much of the state, San Diego has far surpassed the level of jobs held prior to the 2008 recession. However, with the working aged population increase of roughly 240,000 individuals in San Diego County since 2007 (compared to the 141,000 increase in jobs), the real jobs recovery which will bring on mass wage increases isn’t expected until much later.

Industry employment rises slowly

Chart update 12/03/18

Sep 2018 Sep 2017 annual change
Real estate
28,500
28,200
+1.1%

Construction

82,300 81,800
+0.6%

In the housing industry, construction jobs took a huge hit and have just barely started the recovery process. Likewise, the number of employed real estate professionals has remained low throughout this recovery and will not likely increase until the next confluence of buyers and renters (members of the Generation Y and Baby Boomer generations) converge and enter the market in the years following 2021.

Per capita income has recovered

Chart update 12/03/18

2017 2016 Annual change
San Diego County per capita income $57,913 $56,116 +3.2%
California per capita income $59,796 $57,497 +4.0%

The average per capita income in San Diego County is $57,900 as of 2017, the most recently reported Census year. This shows an average increase in income of 3.2% over 2016. Income took a hit in San Diego during the recession, and it took three years for income to finally catch up to 2008 levels.

After factoring in an additional 10%-11% increase in income needed just to cover eight years of interim inflation, homebuyers in 2017 had only slightly higher purchasing power to buy a home or rent as they did in 2008 – all else remaining unchanged. Per capita income in San Diego County is roughly level with the state average, and exceeds levels in the inland valleys by over 50%.

As long as income remains diminished across most job sectors, home prices and the price of rents are limited. This is due to the reality that buyer occupants ultimately determine selling prices in this economic environment  — buyers can only pay as much for a home as their savings and income qualify them to pay — nothing more, unless lenders and landlords want to take on more risky, less qualified individuals. The same fundamental truth is also applicable to tenants’ capacity to pay, which ultimately works to set the ceiling on rental amounts.

Expect per capita income to rise with increases in job numbers. When considering the jobs needed to cover population growth of one percent per annum in the years since 2007, employment numbers and income won’t drive demand for significant additional new housing until after the recovery from the 2020 recession.