Reports of California's Demise are Overblown

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Giant Market: San Diego After unprecedented levels of price appreciation, the San Diego market has returned to normal market conditions. Three factors have contributed to the softening of the market: While some overpriced situations exist, market demand and supply is largely in balance. The 19,400 jobs created in the last 12 months exceed construction levels by 23 percent, which is a healthy de...

December 01, 2005

Giant Market: San Diego

After unprecedented levels of price appreciation, the San Diego market has returned to normal market conditions. Three factors have contributed to the softening of the market:

  • Increasing competition from builders
  • Increasing competition from condominium converters
  • Increasing competition from resale listings

While some overpriced situations exist, market demand and supply is largely in balance. The 19,400 jobs created in the last 12 months exceed construction levels by 23 percent, which is a healthy demand/supply level.

Affordability is a major problem in San Diego, with a median resale home price that now exceeds $550,000. The slowly declining resale volume in San Diego supports the notion that entry-level buyers are being priced out of the market.

The market is very competitive for builders. Buyers have choices, and will purchase the homes that offer the best design and best execution. Lot and view premiums are likely to be declining. This is a time for San Diego builders to be fine tuning their operations, but not panicking. The economics for San Diego dictate a "B" housing market, so the currently soft housing market is likely to correct itself in 2006.

Up and Coming Market: Sacramento

Sacramento recently cracked the list of the top 20 housing markets in the country, with 21,110 permits issued in the last year. Our short-term outlook is a "D" because of the high levels of supply and historically poor affordability. However, we are very bullish on Sacramento over the long-term because it has the following:

  • Jobs — A strong employment base, including Hewlett-Packard, Intel and other operations that are within two hours of Silicon Valley
  • Affordable Housing — At a $400,000 resale median home price, Sacramento is still affordable by California standards
  • Accessibility — The recently expanded airport is within minutes of downtown and two of the country's largest freeways (I-5 and I-80) intersect in Sacramento
  • Land - Thousands of acres of undeveloped agricultural land are within a reasonable commute of the employment centers. Local developers complain about the entitlement woes, but development restrictions are much less severe than in the larger California markets. Flood issues keep much of the raw land from being developed, but we anticipate that levee and other improvements will solve these problems over time.

Sixteen of the top 25 Giant builders in the country have moved into Sacramento in the last few years, making it a competitive market. However, all 16 are likely to do well, at the expense of the small builder.

jburns@realestateconsulting.com

Top 20 Metro Areas
Employment Affordability Permits
Short-Term Outlook/Grade 1-Year Payroll Employment Growth 1-Year Growth Rate Unemployment Rate Median Resale Home Price Resale Housing Costs as % of Income Housing Cycle Barometer 12-Month Single-Family Permits 1-Year Single-Family Growth 12-Month Total Permits Total Permits as % of Peak Permits
1 Atlanta B 14,800 0.65% 5.2% $162,872 23.7% 4.5 58,554 -0.5% 73,715 98%
2 Phoenix B 71,600 4.30% 4.2% $259,000 42.3% 6.5 59,914 0.9% 63,507 96%
3 Houston B 30,600 1.34% 5.2% $143,100 25.7% 4.0 49,000 5.9% 60,029 91%
4 Riverside-SB C 19,000 1.66% 5.4% $360,000 61.9% 7.1 43,960 6.5% 50,454 88%
5 Dallas B 17,400 0.91% 5.0% $158,400 26.9% 3.1 30,064 -0.5% 36,718 50%
6 Las Vegas A 62,100 7.62% 4.0% $300,000 52.2% 5.7 28,859 -13.3% 34,509 84%
7 Chicago C 28,400 0.75% 5.9% $259,000 41.0% 6.8 27,823 -2.2% 40,924 96%
8 Tampa C+ 31,600 2.48% 3.5% $185,000 36.3% 6.2 26,396 18.1% 34,335 91%
9 Orlando B+ 45,500 4.68% 3.6% $229,900 41.1% 6.5 26,253 -4.1% 34,400 97%
10 Washington D.C. B+ 71,800 3.13% 3.0% $430,000 47.9% 7.3 23,730 7.4% 31,933 84%
11 Fort Myers C+ 9,200 4.58% 3.3% $207,310 36.8% 6.9 21,591 67.3% 27,073 100%
12 Minneapolis C+ 21,200 1.22% 5.3% $247,500 34.3% 6.8 17,961 -14.7% 24,088 85%
13 Charlotte A 24,000 3.11% 3.8% $160,250 27.4% 2.5 17,761 1.5% 20,898 92%
14 Jacksonville B+ 13,900 2.38% 4.6% $179,900 31.2% 6.0 17,577 25.3% 24,668 100%
15 Sacramento D 16,200 1.90% 4.9% $400,000 61.4% 8.6 17,084 -9.2% 21,110 89%
16 Denver B 19,800 1.68% 4.9% $248,000 36.6% 5.9 16,997 5.0% 20,823 72%
17 Fort Worth B 9,500 1.20% 4.3% $113,100 20.3% 4.0 15,868 5.6% 19,440 50%
18 Austin B 12,900 1.93% 4.8% $167,600 29.8% 5.1 15,496 -7.6% 19,899 75%
19 San Antonio B+ 9,800 1.28% 4.2% $134,600 27.5% 2.7 13,777 4.1% 21,807 100%
20 Nashville B 10,600 1.48% 4.3% $148,380 26.6% 5.0 13,669 6.2% 17,229 94%
Sources: Bureau of Labor Statistics; Census Bureau through the month ending August 2005; John Burns Real Estate Consulting


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