Perspective on Real Estate

December 11, 2002

January 8, 2003

January 15, 2003


"Bubble" an invention, not reality

There are certain cycles through which real estate travels. None of them have "bubble" as part of its definition. Bubble, in fact, is a contrived word used by analysts, trying to get media attention; and sure enough, it has. To the real estate practitioner, it is a non-word. The practitioner has to "listen" to the marketplace in which he or she is interested in investing, developing or building.

The cycles are irregular, usually dependent on the moods of the Fed and interest rates, the availability and cost of mortgage financing, and the condition of the marketplace in terms of the specific supply versus demand ratio in that competitive place.

The marketplace is measured by supply versus demand. But in the price/rental range, the market has measurable demand for specific product; for instance, a two-bedroom, one- or 1.5-bath, 1,000-square-foot unit carrying a rental of $X a square foot, plus parking supply, location and a host of other factors.

Of course there is a difference in whether it will be a rental or a for-sale and where it is located. So calculating risk, competitive supply, cost and timing are the keys to decision making.

The present San Diego apartment rental marketplace is more complicated and perhaps unique: There is a severe shortage of rentable units, except in the luxury price levels, say above $1,500 per month. There is also a critical lack of entitled land, as well as unzoned land that can be planned for apartments.

When we add the fact that the market area will add 30,000 to 50,000 more annual population, plus from 20,000 to 25,000 more annual jobs created, we can conclude that the demand for low- to middle-priced rentals will continue in a critical supply-to-demand ratio, ensuring pressure on rents.

My conclusion is that despite Moody's critical conclusion that apartments are at an oversupply, overpriced level in almost all markets, San Diego will continue to be a seller's market -- which means that the demand for apartment projects to buy or in which to invest will far outnumber the number of new additional supply built. The shortage will become worse, the selling prices higher.

My regional perspective consists of the following conclusions: A severe imbalance, except in the highest price brackets; the geography of action will expand into more geographies, re-defining "location, location, location"; pricing for entitled/zoned apartment land will keep inflating even if interest rates rise; much more action in converting rentals to condominiums will bring eventual political demand for restricting this because of the crying need for them to remain in the rental pool (that action and cries for rent control will increase); willingness to "overpay" for standing apartments in the "A" and "B" classes, spreading rapidly to older stock; war mobilization subtracts from renter supply as they are called back into service and families begin to double up or move into their parents place; more attention will be paid to rebuilding urban cores of San Diego, Oceanside, Chula Vista, plus growing speculation and gentrification will continue to drive up pricing.

So there is a total housing crisis in this region, and the rental crisis adds the dimension of a "bubble," yes a bubble, because of continual under-building the marketplace demand. Apartment project buyers are paying tomorrow's prices for rentals which they hope will be realized by continuing demand and willingness of the market to play the higher rents. This makes present owners willing sellers, and buyers more into speculators whose cash flow may not be enough to service the new mortgage. This is also called "the greater fool theory" come alive. The market is terrific, but the action calls for analysis and discretion.


Goodkin has been a business ethicist and housing analyst since 1956. He may be reached at sanford.goodkin@sddt.com.


December 11, 2002

January 8, 2003

January 15, 2003