First, Four Crucial Points:
1. Equities go up and equities go down but monthly payments
always stay the same.
2. 99% of people in real estate focus on interest rates.
Interest rates are important but not nearly as much as availability of
credit. Lenders by abandoning credit standards, making no money down
loans, interest only loans, No Doc loans, bad credit loans, plus seller
gifts of down payment loans have created the greatest credit binge in
history driving home prices to unprecedented levels.
3. Real estate is not monolithic. In both up and down markets
there are always overpriced properties and under priced properties.
Generally, San Diego regional prices are falling however last month it
was reported that home prices in some beach communities were “up” 29%
and in La Jolla and Ocean Beach “down” about 16% from 2006. Prices are
determined by location, condition, timing, interest rates and
availability of credit. Two extreme examples to make the last point:
What do you think would have more impact, doubling interest rates from
6% to 12% or requiring 50% down payments?
4. Roughly the sale of 12,000 new homes and condos a year
establishes the values for the 30,000 resales that take place, which in
turn establish the value of nearly all one-million dwellings in San
Diego County. Let me re-emphasize: 12,000 sales determined the
value of the total housing inventory. These sales are the Comparable
Sales used to appraise properties. True, it’s a bit more complicated
but it’s one reason homes that cost $5,000 in the 1950s sell for over
$500,000 today.
Subprime loans are getting attention right now because default rates of
6% are more than double prime loans and are being reigned in. HUD is
proposing the elimination of down payment gifts on FHA insured loans,
both from non-profits and builders. Last week Fed Chief Bernanke
announced the Federal Reserve is contemplating new credit restrictions.
It will take two to three more years to wring out the excesses and
malinvestments of the past five years. When credit is restricted prices
decline.
As a result of easy credit some homes have recently plummeted from their
highs by over $100,000, 7% to 10% and more. Some condo conversions have
plummeted by over $100,000 per unit, 12% to 15% and more. Earlier when
money was easy all the cats and dogs could be sold, now a few prime
properties are coming on the market before prices drop more.
All things equal, coastal areas tend to go up faster than the rest of
the county due to inflation yes but even more so to ever higher demand.
More people every year are willing to pay more to live in coastal areas.
It’s impossible to accurately project future prices of real estate by
the end of the year without knowing what the Federal Reserve is going to
do with interest rates and the money supply. Even the Federal Reserve
doesn't know what it will do because it doesn't know what rates will be
six months or a year from now because it doesn't know what will be the
price of gold, foreign currency exchange rates and the CPI.
Some people were popping champagne corks seeing their homes more than
double between 2000 and 2005, over 25% a year, over $100,000 a year on a
$400,000 home. If they drop or stay flat for four more years as the
real estate cycle runs it course owners will still come out
extremely well.
Absent a terrorist attack, in 10 years it’s a virtual certainty that all
homes in San Diego will be worth substantially more than today, and the
median price it’s obvious will be over $1,000,000 (SFR-Single Family
Residence). We’re talking San Carlos and Clairemont. In October 1975
when the median priced home was $42,825 I wrote an article,
“COMING SOON – THE $100,000 TRACT HOUSE,” which $100,000 price it only
took 5 years to surpass.
Median prices will hit $1,000,000 for two reasons: The government is
printing money 24/7 and the dollar’s depreciation forces new buyers to
spend more “new” dollars to buy the same “old” things, including homes.
(At one time it cost $20 for an ounce of gold -- now it takes nearly
$700. Housing is a proxy for gold. At one time it cost $7,000 for a new
home SFR detached – now $700,000).
Number two, every jurisdiction in San Diego is hell-bent on maintaining
a housing shortage regardless of political posturing. Concern about
“affordable housing” is buffalo chips! Watch how politicians vote, not
what they say. When government does build housing it costs twice as
much ($317,000) per apartment unit. Politicians use developers as
scapegoats for their own flapdoodle against new housing and the news
media is dedicated to destroying anybody who advocates more development
in San Diego. You can bemoan it or profit from it.
COMMERCIAL REAL ESTATE:
APARTMENTS: The median priced apartment (50+ unit complexes)
plummeted from $208,000 in January 2005 to $127,000 last month (April).
The median for all apartments (over 5 units) was $124,000. Depending on
age and size, now that the condo conversion craze has abated, expect
median prices to settle between $90,000 and $135,000 per unit (except
new) contingent on rents.
When interest rates go up --- capitalization rates will go up --- higher
down payments will be required --- and concomitantly, prices will
decline. There have been four real estate down cycles over the past 30+
years that Fredrick Schnaubelt & Sons has been selling real estate.
OFFICE BUILDINGS: In the past two and a half years office
building median prices have remained pretty flat at around $275 per
square foot with a temporary drop of 13% last year. Don't lose sight of
the fact that half of all properties sell for more than the median.
While some brokers specialize in properties below the median I don't
think in 30-years FS&S ever sold any property that did not bring a price
higher than the median for a client.
INDUSTRIAL BUILDINGS: The gigantic surprise since 2005 is the
dramatic increase in the price of Industrial buildings skyrocketing from
a median $110 per square foot to $160, nearly a 50% increase as the
severe shortage of industrial land becomes apparent, land jumping from
$6 a square foot to $40 in some areas. Otay Mesa and Oceanside, at the
extreme opposite ends of San Diego County are perhaps still the most
reasonable between $11 and $16 per square foot. In every market,
regardless of trend, some properties go down and some go up.
Downtown land has been on an amazing seasaw in seven years going
from $60 per square foot for land only to $800 with entitlements to
build, and back down to $250 to $400 range while the new condo overhang
is worked out. Interestingly, some apartment builders are willing to
pay more than condo developers in today’s downtown market, depending on
location and Floor Area Ratio.
TO SUMMARIZE:
Equities go up and equities go down with the real estate cycle. It’s
normal - don’t panic.
Easy money drives prices higher, tight money causes prices to decline.
Tighter money is upon us.
There are overpriced and under priced properties in every market
regardless of ups and downs.
Incredibly, less than 2% of real estate sales (the marginal price/cost)
determine the value of all the rest.
Fred Schnaubelt
