Let the sunshine in. Well, partway, anyhow. Two prominent San Diego economists are bullish on local home prices, and because consumer spending relies greatly on home values, they are also optimistic on retail sales. Two other economists, however, are decidedly not upbeat on either San Diego housing values or retail sales.
Nationally, economic forecasts are becoming less rosy and only partly because of Japan, the Middle East, and consumer fears of rising gas and grocery prices. Marney Cox, chief economist of the San Diego Association of Governments, notes that early this year, the consensus was ebullient: economists were looking for 3.5 percent growth. Now they are lowering their forecasts to 2.8 percent or so, and that’s not sufficient to make a dent in the high unemployment rate. “The same people who saw glorious growth are now seeing a tough road ahead of us,” says Cox.
The national economy has become even more split between rich and poor, and that complicates the retail picture. (Tiffany is doing wonderfully, but Walmart’s U.S. sales are sluggish.) Spending by the rich responds to the stock market, while consumption by most families depends on home values. The stock market, pushed upward by a flood of liquidity, has about doubled since March 2009, even though we have suffered a very weak recovery from a very deep recession. However, “in terms of its impact on consumer spending, the housing market is three times more important than the stock market,” says San Diegan Robert Campbell of the Campbell Real Estate Timing Letter. Consumption by the overwhelming number of households is hog-tied by falling or flat home values.
Now, economists are increasingly fearful of falling national housing valuations. Last week’s national statistics were dismal. Sales of new homes have collapsed, and prices of existing homes are back to 2002 levels. There is a huge overhang of excess house inventories, and many more homes will be going into foreclosure or will be dumped in a short sale, in which the bank swallows a loss. Government initiatives to stimulate home sales began goosing prices in 2009. But once those programs ended in the middle of last year, home prices began falling, although San Diego was one of the stronger markets.
Yale economist Robert Shiller, who is cocreator of the Standard & Poor’s/Case-Shiller measurement of home prices, fears values could plunge another 15, 20, or 25 percent in inflation-adjusted terms. New Jersey–based economist A. Gary Shilling looks for a 20 percent drop.
There are various ways to measure home prices. According to the Standard & Poor’s/Case-Shiller index, San Diego County home values are down 36.5 percent from their high in November 2005. According to Radar Logic, San Diego prices are down 42.4 percent from their peak in May 2006. Last year, San Diego prices rose 9.3 percent, topping all but a few metro areas, says Radar Logic, but prices peaked in August and slipped the rest of the year.
Cox thinks San Diego home prices will drop 5 to 10 percent this year. “There are a whole slug of foreclosures coming back on the market this year,” and mortgage interest rates will rise while lenders remain tightfisted. The falling prices will hurt retail sales: “Consumers are paying down debt and raising their savings. Those two actions reduce the amount of money spent in the economy.”
Kelly Cunningham, economist for the National University System Institute for Policy Research, shares Cox’s pessimism. San Diego home prices have done better than Phoenix (down 56.6 percent from its peak, according to Radar Logic) and Las Vegas (down 61.8 percent) “because our building didn’t get out of hand,” he says. But according to National Association of Home Builders data, last year the median home price was $325,000 and median household income $75,000. “That is a ratio of income to price of 4.3, and it was up to almost 8 in the bubble years,” but it is still high compared with many other cities. “Despite our fall in prices, we’re still the tenth-least affordable market in the U.S.” Not surprisingly, home construction has plunged, “and three or four years down the road, there will be huge pressure to raise prices.”
This year, home prices will be about flat, he says. Retail spending will remain weak. “This year it’s improving, but only because it has been so bad — we’ve been through the worst decline in taxable sales since the Great Depression,” says Cunningham. Then he comes up with a shocker: “Adjusted for inflation, total retail sales peaked in 2006. Assuming normal inflation of 2.5 percent a year, we still won’t be back at that 2006 peak in 2020.” Retail sales and housing values ran up and ran down together. People were borrowing on the increased value of their homes. But the values were phantom. “[People] were spending money they didn’t have.”
But then there is the bright side. Alan Gin, University of San Diego economist, sees local jobs growth of 15,000, compared with the 6000 (half of 1 percent) foreseen by Cox. The employment growth will be in the private sector; the government will be losing jobs, says Gin. This employment improvement could lead to a 5 percent increase in housing prices, as measured by Case-Shiller. People won’t be taking out home equity loans based on zooming faux housing values, “so there will not be wild spending, but retail sales will advance moderately due to the improving employment situation.”
Although Campbell fears the black clouds hovering over the housing sector, his charts show that the primary trend for San Diego home prices is still up.
And now for the jolly view. Alan Nevin, director of economic research for MarketPointe Realty Advisors, pooh-poohs Case-Shiller. “Those data are completely discredited by the research industry,” Nevin claims. “In almost every place in California, Arizona, and Nevada, the distress sales [foreclosures and short sales] are 60 percent or more of total sales. In San Diego, they are 33 percent.”
Things are even improving downtown, Nevin claims. In the hot market of 2005, downtown condo resales totaled 720. Last year, the number was 707 — although Nevin concedes that average prices in 2005 were double the 2010 level.