I’ve read the bullish forecasts for real estate and find that there is a growing incredibility gap with each new forecast claiming that it is blue skies forever and that there is no bubble because people can afford the 130 percent increase in home values (in Southern California), despite a less than 4 percent increase in real wages over the same period.

I have lived in the San Diego area on and off since the early 1970s. Boom and bust is part of the history of real estate and each time it is triggered by the same thing: overpriced homes.

What is overpriced?

I’ve read the bullish forecasts for real estate and find that there is a growing incredibility gap with each new forecast claiming that it is blue skies forever and that there is no bubble because people can afford the 130 percent increase in home values (in Southern California), despite a less than 4 percent increase in real wages over the same period.

I have lived in the San Diego area on and off since the early 1970s. Boom and bust is part of the history of real estate and each time it is triggered by the same thing: overpriced homes.

What is overpriced? First, the average household income for this area is $52,000 and average home prices are in excess of $460,000. Second, rents have trailed so far behind prices that investors have disappeared. Who is going to invest in the average home at $460,000 when the rental value will barely cover the property taxes and homeowners’ dues? Third, as less than 12 percent of the people can qualify for a traditional fixed-rate loan, the vast majority of buyers have been taking out “creative financing,” which is another word for rent.

Inventories are growing, up 63 percent last month and new-home sellers are beginning to offer “incentives” to entice buyers back into the showroom. Centex, for example, currently offers up to $25,000 to anyone willing to buy one of their homes along the I-15 corridor. The San Diego Union Tribune reported this week that there has been a 50 percent rise in the number of new-home buyers walking away from their contracts. The newspaper also reported a fall of 30 percent in downtown condo prices-for August alone. Orange County reported a seven-month inventory of homes, the highest since the boom began eight years ago.

History is a good teacher and it tells us that the last crash in the early ’90s had pretty much the same scenario as today. House prices were out of alignment with incomes (4.5 times in 1991, and almost eight times today, based on average income and average home price) and jobs were disappearing. The local newspaperreported three weeks ago that it was the view of the San Diego Chamber of Commerce that this city has a jobs crisis with people leaving to live and work elsewhere due to overpriced homes. U-Haul reported a new outflow, just like the early 1990s. 

Real estate agents say it’s different this time because back then it was the defense industry that collapsed. But how do they explain other areas in the U.S. without defense employment that were also collapsing at about the same time? 

England also had a collapse in the early ’90s and they did not suddenly lose defense jobs. It is interesting to note that England is in its third month of a downturn in property prices and most people believe a high magnitude correction is coming. The International Monetary Fund has been reporting all week that it is now a global phenomenon and overpriced markets will fall more or less together, with no mention of gentle landings or flattening out. The IMF’s concern is the strain it will place on the world’s banking system and that foreclosures will rise dramatically (just as they have done every time there is a crash).

Having seen previous housing booms and busts, I believe we are in the early stages of a large correction that will begin in earnest in November and reduce average values in Southern California by 40 percent. The Union Tribune reminded San Diegans that the last crash reduced prices by 66 percent in some areas (Chula Vista) and that many areas in the county are at risk for significant price drops. Even Federal Reserve Chairman Alan Greenspan has said some areas in the U.S. have gone out of alignment with fundamentals and will see a correction. Greenspan was referring to regions where prices have increased by more than 20 percent over the past five years. How about those areas where prices have increased by more than 120 percent over the same period? A flattening of prices? Dream on.

Clive R. Hickman is a retired U.K. lawyer who’s been involved in buying and selling real estate for most of his life. He regularly watches the national and international housing markets to see what lies ahead. He is a resident of Carlsbad, Calif.

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