Setting the Scene
In San Diego, we have now endured almost four years of home value depreciation and almost two years overall economic purgatory. We may be approaching stabilization. Home sales and prices have actually been trending north for several months. Inventories are relatively low (except in a couple of communities, like downtown). Interest rates remain at decent levels. So, are happy times here again? Not quite.
As a major metropolitan area, the region has lost tens of thousands of jobs during this period and population growth has been static if not slightly declining. There is also a ?shadow inventory? of distressed homes that will soon hit the market and clutter up the inventory once banks release their next wave of foreclosed homes. This, however, is a relatively short term issue (1-2 years).
Sitting here scarred and battered from the recent past, it?s kind of difficult to think about the potential for the next wave of real estate price appreciation. Conventional wisdom suggests (demands?) that we have all learned a lesson about unrealistic expectations. Newton was right, after all. So why am I now thinking that we are going to have a significant home supply problem in the not-too-distant future that will result in pricing pressures to the upside? Because, we are fast running out of developable land.
(A cautionary note and a great big caveat: As I Googled my way through various resources and reports used here, I found variations in the population, housing and building permit statistics, depending upon the issuing agency. The message – Your mileage may vary).
The Supply Side (Land)
The San Diego metro area is bounded and physically constrained at all points of the compass (Mexico to the south, mountains to the east, Camp Pendleton Marine base to the north and, of course the big wet thing to the west). Although the County has a huge supply of land, that which is developable must go through an entitlement process that is better described as a three dimensional Rubik?s Cube on performance enhancing drugs, including a 3 to 5 year process (for anything substantial), plus millions of dollars contributed to our local economy compliments of the wonderful CA Subdivision Map Act, keeping a team of dedicated government staffers and many private consultants ?stimulated? for years. That?s before the first shovel of dirt is turned.
Here?s the meat, though. According to the City of San Diego General Plan, there are only about 8,000 gross acres of vacant land designated for residential uses. Of that, only about 3,000 acres may actually be developable. For a major metropolitan area this is pocket change. The unincorporated area of the County allowing residential uses is quite large (128,000 acres, according to the County General Plan Update ? currently in draft form) , but most of this land is located in the far reaches and is environmentally challenged, and all of it is designated for very low density rural or semi-rural development. These unincorporated areas will not contribute much to the region?s future housing supply.
There are several other cities in the region that will help some. Chula Vista probably has the single largest tract with the Otay Ranch master-planned community which is predicted to accommodate 27,000 dwelling units at completion. San Elijo Hills in San Marcos will ultimately contain 3,400 homes, but that development is about 75% completed already. The approved the Fanita Ranch project in Santee is approved for 1,400 homes (although the developer, Barrett American just went BK). There are a few more scattered parcels of land around the County that I may have missed, but the picture is pretty clear. The only way to create more residential capacity is through infill, redevelopment or rezoning.
The Demand Side (People)
According to the San Diego Association of Governments (SANDAG), in January, 2008 there was a population of about three million residents living in San Diego County (including all cities and unincorporated areas). We are growing at about 1% per year but this will likely increase as we exit the recession. This equates to about 30,000 new residents per year, through migration and/or natural increases. Recently it has been primarily organic growth due to the recession. Let?s assume that the economy stays relatively flat or just grows slightly for a few more years and we have a moderate 1.25% increase per year. Under this scenario, in just five years we will see our population increase by about 192,000 people. If, during this period the local economy and, therefore employment, starts to grow again, we could have far more people living here.
The Supply Side (Homebuilding)
According to the U.S. Census Bureau, during the thirteen year period from 1996 through 2008 (right after the last recession in San Diego) building permits were issued for a total of approximately 126,000 dwelling units here (all types ? detached, attached, for sale and for rent). That?s an average of about 9,700 units per year even while the population was increasing by about 30,000-50,000 people per year. With an average household size of 2.73 people (U.S. Census, 2000), this was an insufficient supply of homes for the demand, hence contributing to price appreciation pressures.
Now consider that building permits issued during 2008 dropped to only about 4,300 units –The free market has been doing its thing. Then, go back to the assumption that there may be at least 190,000 more people living here in five years. Add in the challenge that home builders will face securing construction financing for future residential developments. The combination of a growing population, a constrained pool of vacant land and home construction financing difficulties suggests that it is not hard to envision a shortage of housing within this timeframe. And with that as a background we may see home prices, once again, pressured to the upside. But this time it will not be because of stated income, no down payment, interest only loans.