August 22, 2007

Hurricane Season: The Eye of The Storm

We have retained the blog at the end of this page to help to keep prospective  on the changing market from earlier in the year until now. As the two year anniversary of the turn-down in the residential market approaches, the turmoil is more dynamic and the situation worsens. It appears that the market will take at least another year to sort everything out, including:

  • A decimation of the credit markets such that mortgage debt is unobtainable for all but a select few. And expensive for everyone.
  • An acceleration of Trustee sales and Notices
    A downward tragectory in pricing, although at a very slow pace, and measured by an ever decreasing inventory of sales transactions.

Most are simply not participating in the housing market. Buyers and sellers alike are sitting it out, for now, although bargain hunters are out there for foreclosures and otherwise distressed sales.

Builders are not delivering housing, and essentially haven't been for almost two years. No new deliveries means that the market will not be over-supplied, a silver lining that will prove beneficial when the market is ready to turn.

The recent slide in the stock market, the resulting infusion of capital and lowering of the discount rate by the Fed is designed to promote stability. Stability is exactly what is needed to create a base from which lenders can lend and buyers can buy. This is hurricane season. Everything is swirling. The markets are uncertain. But this period will be followed eventually be a return to stability. When that happens, housing will not be much cheaper, loans will be more expensive and incomes will not make up the difference.

July 7, 2007

History Not As We Know It

Broad historical preservation guidelines are
being used to thwart ‘smart growth’ projects

We travel the world to witness history, and adore and admire historic buildings. Even buildings that aren’t so distinctly historical, but within which somebody accomplished something of great importance or an accomplished person lived or worked, can be historic. All of these buildings, or sometimes neighborhoods, deserve special recognition because they give us perspective, insight and a tie to the past over the generations.

However, is the city of San Diego overbearing in its application of historic preservation? The answer is yes. Read why

April 2, 2007

An Opinion On Everything

Gary London had the opportunity to express his opinions on various land use issues on the VoiceofSanDiego.com web site's blog "Cafe San Diego". Among the issues covered included a new idea for keeping the San Diego Chargers at the Qualcomm site;revitalizing Clairemont; using technology and behavior modification to solve transportation problems;arguing for colocating employment and housing; the importance of condo conversions; the tragedy of County TIF fees on commercial projects; and the lack of public art at Liberty Station, to name a few. View the blog for the complete article.

March 1, 2007

Tapping the Value of Density

Affordable housing, open space, infrastructure, and public amenities. How do we pay for all this, let alone encourage existing communities to embrace density in their own backyards? While the norm is to exact fees or award bonuses, neither of which have any significant impact, this article explores the one true asset of cities and plannng agencies nationwide: density.


The amount of revenue that can be generate from a density recapture program is significant. Click the link below for the entire article from Urban Land Magazine.

Tapping the Value of Density

 

January 22, 2007

2007 is Evolving into a "No-Transfat" Market


Not to detract from Starbucks or New York City, but the way we see 2007 evolving is as a market that is cutting the fat out .... in pricing and valuation; in capitilization rates and investors; in transaction activity; even in amenities offered... as a confluence of events are starting to emerge. They include, at least:

  • An oversupply of office space, and possibly industrial: CoStar reports that five million square feet will be built, raising the vacancy level from its current 10% to perhaps 14%. Industrial space additions were also at least 5 million square feet, but most of that was occupied.

  • A dramatic reduction in the supply of new and used homes: Approximately 7,500 new homes were permitted last year (not counting conversions), and this year's number could be 1/2 of that. Resales are coming down: 26,000 last year, from its decade peak of 60,000, six years ago.

  • A significant increase in notices of trustee sales: these are potential bankrupticies, which increased from 5,000 to 10,000 in the last year, and are certainly going to go higher in 2007.The most fragile buyers are impacted. But while notices are way up, actual Trustee sales are not a big factor, yet.

  • Declining price points in single family homes, as well as income properites: new home prices are down over the past year from $948,000 to $826,000, resales are down from $592,000 to $579,000, and income properties are on a downward valuation path.

  • The high cost of construction: construction costs were up last year, although there are signs that hard costs and labor have peaked. For the time being, this means that if not already committed (e.g. those half-built condo highrises) most projects will not be started in this cycle.

  • Moderate level job creation but extremely weak population inmigration: the region added 19,000 jobs and 26,000 persons, but domestically we are mostly growing from 'natural' increase as added 600 persons domestically. However, the majority of growth in the county is due to foreign migration.

  • The stablization of interest rates at a low level: rates are hovering just above 6% and seem to be remaining there.

  • Economic conditions remain strong: unemployment locally is now 3.9%, while the state and national unemployment rates are well over 4%.

These reflections are essentially the story which emerges from the tables and charts which we have posted throughout our web site (starting at The Overall State of the Economy). Standing alone, the data suggest that the San Diego region is weakened, but not dramatically. The numbers suggest that by most measures the region can sustain itself until a better market emerges.

This is true, as long as slower market conditions do not last long. "Long" in the real estate world means many months or years. It would be highly presumptuous to suggest that 2007 is going to come out of its doldrums in the second half and be a banner year. That is not what is going to happen. The best that we can hope for is that the fat is cut from the market throughout the year, and we look to 2008 as the reemergence of the marketplace. Caution: this cyclical downtrend could very well last much longer.

Staying Afloat

The residential market reached its peak in September 2005. The time it takes to manuever through a descent will be the difference between a soft landing and a very bumpy or, perhaps, crash landing. If the present market conditions adjust further in the foreseeable future, a steeper downward trend in pricing could occur.

It is clear that what is saving this market is the combination of lower inventories of new and resale homes, coupled with low interest rates. The market is not glutted, and buyers can still buy if they want. However, it will not be a productive year for home builders. They can take their time up in the long, cumbersome entitlement process!

What bothers us the most is that there is limited market expansion. While we have added 18,000 jobs in a limited in-migration market (see Components of Population Change chart), it is foreign migrants who have fostered the growth in the region (plus 15,000 for 2006) while domestic migration was negative (a loss of 14,300). The market has to expand to keep everyone healthy. And expanding on natural increase (e.g. more births than deaths)alone is insufficient in the short run. Child labor has been outlawed in the U.S.!

These numbers play a significant role in the commercial and industrial sectors which will combine last year, and part of this year, to add 10 million square feet of space. That translates to 30,000 to 35,000 jobs. Either the result will be new growth in population and jobs, or a lot of vacancy. This is a potentially very troublesome over-expansion, although over the short term unemployment remains low and the strong and diversified San Diego economy appears to accomodate this growth.

Not Stupid Capital

The capital markets seem to be disciplined, as well. While there is abundant capital for investment at every level, it is not stupid capital. This is reflected in an end to the low spiral of capitalization rates. The over-paying for such assets as apartments (principally for conversion purposes) has come to an abrupt halt. We are assuming that a slowdown in commercial investment will follow for the near future.

San Diego is expensive and will remain so. In fact, if there is a significant decline in residential pricing in 2007, be assured that homes, particularly high rise condos, will not be built. They simply are not feasible in a lowering revenue/high cost environment.

And that is the good news. The supply and demand factors seem to be playing out such that the market appears to be balancing as it extracts the unnecessary transfat. The key is for this to continue in an orderly manner. And if it does, we will be projecting a much more robust 2008!











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