San Diego County continues its long recovery from the 2008 recession and financial crisis, even as we head rapidly into the 2020 recession.

Residential construction has yet to gain any momentum in San Diego, falling back considerably in 2019. 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 2022-2023.

However, the economic response to the global pandemic has cause job losses to ripple across the state in 2020. Looking ahead, San Diego County will see sales volume continue down, bottoming in 2021-2022. Slowing sales means home prices will also cool, though today’s low interest rates will counteract slowing sales to keep prices propped up despite the bleak economic picture.

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

Updated May 26, 2020. Original copy posted March 2013.

Home sales volume slows

Chart update 05/26/20

2019 2018 2017 2003: Peak Year
San Diego County home sales volume 40,100 39,600 42,500 60,800

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

40,100 home sales closed in San Diego during 2019, amounting to 500 more homes sold than in 2018. For perspective, this 1% increase still leaves San Diego 50% below peak 2003 sales numbers.

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.

The down sales volume throughout the past decade can be attributed to a lack of 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 slowed in 2017, following the increase in mortgage rates at the end of 2016. This slowing continued into 2018, with 2018 sales volume 7% below a year earlier. Sales volume remained flat in 2019.

The forecast for home sales volume in 2020-2021 is a further decrease. The economic response to the novel coronavirus (COVID-19) is pulling would-be homebuyers and sellers from the market. After volume and prices bottom in 2021-2022, homebuyers will return in greater numbers to push the housing market to its next recovery, expected in 2022-2023.

Turnover rates are up: good for sales

Chart update 03/08/19

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 05/26/20

Q1 2020
 Q4 2019 Q1 2019
San Diego County homeownership 57.0% 59.4% 51.7%

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 at 57%, it is well above the statewide average of 55% in Q1 2020. As home prices continue to adjust downward in 2020 due to declining home sales volume, the homeownership rate won’t rise significantly until homebuyers regain confidence in the housing market, returning in larger numbers in the years following 2022.

Home prices fall back

Chart update 05/26/20

Q1 2020 low-tier annual change Q1 2020 mid-tier annual change Q1 2020 high-tier annual change
San Diego County home pricing index +6% +6% +4%

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.

But in 2018, home price increases sharply declined in reaction to slowing sales and rising interest rates, which began in late-2017. The annual pace of increase is now just 6% in the low- and mid-tiers and 4% higher in the high tier, lower than in recent years when the annual rise averaged around 10%. Expect falling home prices to continue into 2020, with the arrival of the next economic recession, seeing prices bottom in 2021-2022.

In 2020, the response to COVID-19 will see downward pressure on home prices. Accurate home price reports run about two months behind current events. Even when caught up, “sticky prices” tend to persist several months beyond the moment when home sales volume begins to slow. Starting in March 2020, economic volatility and shelter-in-place orders caused home sales volume to decline. However, historically low interest rates have provided a boost for buyer purchasing power, which will continue to prop up home prices – somewhat – in 2020.

Multi-family construction leads the way

Chart update 05/26/20

2018 2017 2016
San Diego County single family residential (SFR) starts 3,000 3,200 4,100

San Diego County multi-family starts

 5,000 6,400
7,800

Residential construction starts continued to slow in 2019, declining 6% for single family residential (SFR) starts and 22% for multi-family starts. Until 2018, the recovery had 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 SFR construction starts in San Diego County is still far below 2002-2004 numbers. The next peak in SFR construction starts will likely begin around 2022.  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 05/26/20

Mar 2020 Mar 2019 annual change
San Diego County employment 1,504,400 1,494,000 +0.7%

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 166,700 increase in jobs as of Q1 2020), the real jobs recovery which will bring on mass wage increases isn’t expected to arrive for two-to-three years.

Industry employment rises slowly

Chart update 05/26/20

Mar 2020 Mar 2019 annual change
Real estate
31,100
28,800
+8.0%

Construction

 80,200 81,900
-2.1%

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 2022.

Per capita income has recovered

Chart update 03/03/20

2018 2017 Annual change
San Diego County per capita income $61,400 $58,100 +5.7%
California per capita income $67,000 $63,900 +4.9%

The average per capita income in San Diego County is $61,400 as of 2018, the most recently reported Census year. This shows a fairly large average increase in income of 5.7% over the previous year. Income took a hit in San Diego during the 2008 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 2018 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 slightly lower than the state average, and exceeds levels in the inland valleys by roughly 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.