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Is San Diego in a Bubble!??!

Posted by Christie Gray on Thursday, September 28th, 2017 at 11:21am.

Hey friends!  I've gotten asked a few times this week about our market here in San Diego, when a shift may be coming, and if we are in a bubble.  While no one can predict the future with 100% certainty, we can definitely explore what's going on and try to get a read on where we're going.  

First, let's talk about "bubbles."  Bubbles in real estate are characterized by two main features: 

1.  Values:  Prices become exceptionally high compared to other market indicators (like rent).  Prices rise extremely quickly. 

2.  Psychology:  Investors are optimistic to the point of euphoria and are dismissive of risk.  They feel invincible! 

I do not see EITHER of these two features occurring in today's market.  Let's dig into that a little more.  It is true that values in San Diego are up.  However, interest rates are still down and rent is very high, which makes the average home price not insanely out of control.  For those of you who like numbers, check this out.  In the last 12 months, home values went up 8%.  In the next 12 months, it's predicted that they'll rise another 3%.  This is a huge shift, which signals that the market is still rising but not at extreme rates and may be starting to level off.  The average rent is now way above $2,000/month in metro San Diego, which is not far off from many people's mortgage payments.  

I also don't see the "euphoric" buying mindset.  Overall, it feels like buyers are being careful to buy within their means, and even if they weren't, banks are so stringent now that it's next to impossible to qualify for a loan you can't comfortably afford.  I feel like buyers are assessing risk closely, and really thinking about their monthly payment and long-term financial goals. 

From where we were this summer, home prices would have to rise another 18% in excess of rents and incomes in San Diego to qualify as a bubble.  With rents so high and prices looking like they may stabilize, I just don't see that happening.  

Here's one more way to look at it for you visual learners: 

We are quite a bit below the "bubble threshold" and massively below where the valuation index was the last time we were in a bubble.  You can see how steeply the valuation index rose from 2001-2005.  Everyone could qualify for loans, so of course people were buying in droves, and having a ton of people buy properties they truly couldn't afford was a recipe for disaster.  That's not the case at all anymore. 

To sum it up, in the next few years, I think we will see interest rates rise, and values climb a little more, then level out, then start to decrease.  I think we will see a shift/turn in the market, but not a "bubble bursting" or a total devastation that occurred at the peak of the last cycle.  Agree?  Disagree?  Have a great day! 


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