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Anderson Forecast predicts 'mostly soft landing' for San Diego area
Wednesday, May 03, 2006

By Glenn Roberts Jr.
San Diego's real estate market "will continue to slow along its current trajectory," and "significant declines in home prices are unlikely" from 2006-08, according to an Anderson Forecast report.

Home sales activity in San Diego County fell 30 percent since peaking in April 2004, while home prices hit a plateau and stayed there for most of 2005.

The forecast, a research branch of the Anderson School of Management at University of California, Los Angeles, has typically focused on economic predictions for Los Angeles County, California, and the nation, and San Diego represents a new local area for the forecast.

Ryan Ratcliff, an economist for the UCLA Anderson Forecast, and Alan Gin, an associate professor of economics at the University of San Diego, wrote the report.
While several national real estate economists and analysts are projecting a soft landing for the real estate market this year, that "landing" arrived early in San Diego, and this latest report attempts to sort out whether this local real estate market will suffer a hard fall and harm the region's economy.

The UCLA Anderson Forecast, Anderson School of Management and The Rady School of Management at University of San Diego participated in the first annual San Diego Economic Outlook Forecast Conference today at the San Diego Marriott Hotel and Marina to discuss the local forecast.

In 2005, the median price of a house was nine times higher than the median income in San Diego, and home prices have roughly doubled in the past six years when adjusted for inflation, according to the economic report.

Price appreciation, though, began to slow in November 2004 and December 2004, and median prices were flat for most of 2005, the forecast noted. The forecast refers to "that crazy B-word" – bubble – that has popped up in many real estate discussions as experts debate whether there will be a devastating burst in local or national real estate markets.

While the word "bubble" seems to suggest that it implies a "pop," or a period of substantial home-price loss, the Anderson Forecast states that a bubble market is more a situation in which the market price of a home is out of whack with the fundamental value of the asset.

And while the report notes that the Advance Forecast "has advanced its opinion that the real estate markets in Southern California are in a bubble-like state," it also states that this does not necessarily mean home prices will drop.

Christopher Thornberg, UCLA Anderson Forecast
Christopher Thornberg, a senior economist with the UCLA Anderson Forecast, stated in a summary of the economic outlook, "Housing prices will not plummet … this is not a common characteristic of the end of a housing bubble. Rather they will remain largely stagnant for a number of years until the fundamentals manage to catch up with market prices."

The forecast by Ratcliff and Gin states, "The central question for San Diego's economy over the next several years is how this real estate slowdown will affect the wider economy," noting that the future of San Diego housing markets presents "an interesting puzzle" – there is a low probability of a recession in the next two years though home prices in the area are out of line with such fundamentals as income and rent growth.

"Unfortunately, with no historical parallels to draw on for a recession-less housing slowdown, we can only make an educated guess. Arguments suggest that the answer is more slow growth: sales will continue to fall, but not by the 60 percent we saw in San Diego during the 1990-91 recession.

"Prices will stay flat, rising at or slightly below the rate of inflation – in essence, a pause of several years to let the fundamentals catch up," the forecast states. "Residential real estate markets have a couple of tough years in store, but in the absence of a recession we do not expect to see a repeat of the mid-1990s."

So does that mean a soft or a hard landing? The forecast calls for a mix of both: "a mostly soft landing – though harder than the first two years of this real estate slowdown."

Construction employment is expected to drop at the end of this year, with declines of about 8 percent through the end of 2008. Taxable sales growth should also slow, though strength in tourism and professional services should boost the economy.

"This is a little bit more optimistic than the forecast for other Southern California counties, in large part because San Diego has already lived through two years of slowing real estate markets with little injury," the forecast concludes.

The median price of existing homes in San Diego County has increased from $449,949 in first-quarter 2004 to $571,212 in first-quarter 2006, a gain of about 27 percent. Sales of existing homes have sunk about 33.8 percent from first-quarter 2004 to first-quarter 2006, and about 17.9 percent from first-quarter 2005 to first-quarter 2006.

Meanwhile, real personal income for area households has remained fairly level during the same period, increasing from $101,823 in first-quarter 2004 to $107,809 in first-quarter 2006 – a gain of 5.9 percent. Average real annual wages in San Diego were about $38,000 in 2005, which is below the state average of about $40,000.

Since 2003, the flow of people moving to San Diego from within the United States has turned from positive to negative, and high home prices are a likely contributor to this shift in migration, the forecast report states.