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— You read it everywhere: the city of San Diego may be broke, but the underlying regional economy is robust. Sorry. I can't agree. The local economy appears strong now but sits on a powder keg. The real estate gambling game will be destructive.

San Diegans are underpaid and far too deeply in debt -- both mortgage debt to pay for homes that are among the priciest in the nation, and credit card debt to finance the Southern California lifestyle and pay gas prices that are consistently among the highest in the country.

The housing bubble will burst; it's just a matter of when. In fact, the steep rate of increase seems to be slowing already, as sales drop off slightly. The bursting could be caused by high interest rates, as when local bubbles burst in the early 1970s and 1980s, or economic problems, such as the aerospace/defense collapse of the early 1990s. This time, the crash may come because prices are absurdly high. Unforeseen tech or tourism industry woes could set off a downspiral.

In the recently unveiled 2006 San Diego budget, city manager Lamont Ewell commits the typical error. He concedes the city is ailing but points to a strong regional economy. He says that last year's unemployment rate was lower than the state's and the nation's. He says San Diego tourism was the nation's fourth-best performer last year. That's true, but he doesn't mention that even the local industry doesn't expect a repeat this year. Then he cites the convention center's claim that delegate spending leapt 36.5 percent last year. But even local tourism experts are suspicious of the center's statistical hyperbole.

Then Ewell declares, "The median price of a home in San Diego was $491,000 in December 2004, a 21.2 percent increase over December 2003. Each month in 2004 recorded a year-over-year price increase greater than 20 percent." While it's true that people's feelings of economic well-being are greatly influenced by the value of their homes, it is also true that exaggerated feelings of well-being can be an economy's worst enemy. When home prices get as high as they are now in San Diego, they are not a positive for the economy. They are a time bomb.

The median price of a resale single-family home in San Diego is almost $590,000. A new home goes for about $200,000 more than that. The median single-family home in San Diego goes for more than three times its equivalent in Phoenix and Atlanta; almost three times Colorado Springs; more than double Chicago and Denver; double Miami and Ft. Lauderdale; four times Dallas and New Orleans, and five times some places that aren't so pleasant to live in: Amarillo, Buffalo, Little Rock, El Paso, and Rochester, New York. San Diego is a desirable location, but is it that desirable?

The question is particularly apt when you figure how much debt San Diegans must take on to buy these homes. A rule of thumb is that a family should shell out no more than 28 to 32 percent of monthly gross income for housing costs -- principal, interest, taxes, and insurance. "In San Diego, the figure is now 40 to 45 percent," says real estate guru Sanford Goodkin, who heads an advisory firm under his own name. At least half of San Diego homebuyers are now signing up for adjustable-rate mortgages, and it could be 60 to 65 percent, says Goodkin. But higher future interest rates will cause problems. Loans that offer low payments in early years make home purchases possible for many. But the piper has to be paid.

Only 11 percent of San Diego households can afford the median-priced home -- among the nation's worst affordability ratios. When the median housing price is divided by median household incomes, San Diego is either the first or second most expensive city in the nation, according to Ryan Singer, staff economist of the San Diego Regional Chamber of Commerce. Expensive mortgages are only part of the story: "The amount of household debt carried by San Diegans is of major concern for the economy and for local residents," says Singer.

In tapping home-equity loans, people could be borrowing on phantom equity.

San Diego is getting more like San Francisco, says Howard Roth, a former San Diegan who is chief economist for the California Department of Finance. It's difficult to fathom how low-wage people can afford to live in the area. "There must be tremendous commutes or doubling-up in housing," says Roth. "I wonder how people make a go of it when they are not professionals. The striking thing about San Diego is the disparity between household income and the cost of housing. It seems to suggest a tremendously skewed income distribution."

The numbers show it. Last year, the average annual wage in San Diego was $39,149, only $2349 above the national average. But the San Diego cost of living is 47.7 percent above the national average, according to the American Chamber of Commerce Research Association. Brother, that is a squeeze.

But generally, "The fastest-growing jobs in San Diego are low-wage service jobs such as security guards, landscapers, and retail clerks," says Donald Cohen, president of the Center on Policy Initiatives.

"Between the year 2000 and 2003, the last year for which we have data, all kinds of income -- family income, household income, per capita income -- have remained absolutely flat," says David Karjanen, director of research of the center. "During that period, we have had a lot of economic growth. Gross regional product [the total economic output of San Diego County] has increased at one of the highest rates of any county, but over that period incomes have been absolutely stagnant."

So what do you suppose San Diegans have been doing? Here's a hint. Who plays the lottery? Who goes to casinos to play slot machines all day? Poor and middle-class people who have no business gambling. And that's what San Diegans have been doing with their housing: gambling. Goodkin estimates that an astounding 38 to 42 percent of San Diego homebuyers are buying primarily in hopes of selling for a higher price. "And I'd consider it dangerous when 15 percent of buyers are speculators," he says. (In March, the New York Times estimated that 12.6 percent of San Diego home purchases were for investments, not living purposes. That was fourth in the country.)

It's the Greater Fool Theory. People know the merchandise is overpriced. They figure they can lay it off on another sucker before the music stops.

The speculation explains why so many mortgages are of the speculative kind. If they are gambling, "People feel they have no vested interest, no equity. If anything happens, they can walk away," says Goodkin. "Downtown condos are a very dangerous situation. It's a powerful market. It attracts speculators from all over the globe," many of whom are taking advantage of a weak dollar. "With interest rates low, why not go out and buy? With each passing month, it attracts more and more speculators. They are borrowing from the future. The weakness comes from too much speculation. It's a law of physics: what goes up must come down."

And San Diegans do not have the incomes or the employment base to absorb the trauma.

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