San Diego Housing Indicators

San Diego County continues its steady recovery from the 2008 recession and financial crisis. Jobs and per capita income are recovering quickly — a good sign for San Diego’s housing market. In San Diego, as in other regions, the strength of home sales volume depends on a complete jobs recovery.

Residential construction faltered beginning late-2014. Thus far, multi-family construction has experienced a quicker recovery than single family residential (SFR) construction. Expect the demand shift from SFRs to rentals to continue, injecting growth into multi-family construction in upcoming years, peaking around 2019-2020. Vacancy rates will then increase, as turnover tenants will increasingly go for homeownership.

View the charts below for current activity and forecasts for the San Diego housing market.

Home sales volume still low

San Diego County’s home sales volume ended 2014 6% below a year earlier. While disappointing, this is slightly better than the 7% drop in volume experienced statewide. This drop follows the generally flat sales volume trend in San Diego County since early 2010. However, 2015 sales volume ended up nearly 12% higher than 2014. This boost in partly due to lower mortgage rates in 2015 and to the area’s relatively swift jobs recovery.

Despite this, sales volume is not expected to increase significantly until end usersreturn to the market, which is now beginning in San Diego but has yet to reach its full potential. Expect sales volume to continue at its present strong pace through 2016, only to slowdown in 2017 following the forthcoming increase in mortgage rates.

A full recovery of jobs lost in the recession took place in 2014. However, with the intervening population gains, jobs won’t reach a complete recovery until around 2018. At that time, home sales volume will take off, reaching its cyclical peak around 2020-2021.

Turnover rates are up: good for sales

The percentage of San Diego County homeowners and renters moving in 2014 rose slightly over 2013. This trend is the opposite in most parts of the state, which demonstrates San Diego is farther along the path to a complete housing recovery. However, turnover rates for both owners and renters remain well below pre-recession levels.

Lower turnover rates are indicative of cash-strapped households that simply cannot afford to move, whether they are homeowners or renters. When turnover is low, home sales volume is hindered.

The turnover rate in San Diego County has not suffered as much compared to the rest of Southern California. This is partly due to a better jobs outlook and San Diego’s large military population, which traditionally experiences high turnover. Agents can gain an “in” with this population by familiarizing themselves with the various benefits available to military renters and homeowners such as Veteran’s Administration (VA)-guaranteed and CalVet mortgages, then advertising themselves as experts.

Homeownership falls

San Diego County’s homeownership rate has followed the general statewide and national trend of decline in the years following the Millennium Boom. It peaked at 63% in 2006 for San Diego County, finding a low of 52% in 2010. 2014 saw a surprising jump in homeownership in San Diego County, peaking at 57.5% mid-2014. However, it most recently fell back to below 51% at the end of 2015.

The homeownership rate in San Diego County has historically been comparable to the rest of the state, though has recently fallen well below the state average of 54%. However, it’s unlikely the trend will continue. With elevated home prices and the imminent rise in mortgage rates late in 2016, the homeownership rate won’t rise significantly until homebuyers return in larger numbers around 2019-2021.

Home prices continue to rise

The price of low-tier housing in San Diego County skyrocketed after the latter half of 2012, peaking in Q3 2014 and leveling off after. 2015 experienced another, more moderate price increase. This is likely due to the boost given by decreased mortgage rates throughout 2015.

Lower mortgage rates free up more of a buyer’s monthly mortgage payment to put towards a bigger principal. Thus, San Diego’s high home prices continue to find fuel — not from speculators as in 2012-2014 — but from increasedbuyer purchasing power.

Expect home sales volume to fall off after mortgage rates begin to rise in the second half of 2016. Prices will descend 9-12 months later, by the second half of 2017.

Multi-family construction leads the way

Residential construction starts began to show signs of life in San Diego County in 2013, but the rise waned throughout 2014, only to pick up again in 2015. Thus far the recovery has been concentrated in multi-family starts, due to the increased demand for rental housing experienced during this recovery. Fueling this increased rental demand are:

• a demand shift from suburban living to city dwelling by the youngest generation of homebuyers, Generation Y (Gen Y);
• an increased resistance to homeownership following the housing crash; and
• the higher barriers to homeownership due to the return of mortgage lending fundamentals which tightened mortgage lending.

Today, the general trend for single family residence (SFR) construction starts in San Diego County is up, but still far below 2002-2004 numbers. The next peak in SFR construction starts will likely occur around 2020.  Even then, SFR construction starts are highly unlikely to return to the frenzied mortgage-driven numbers seen during the Millennium Boom.

Jobs recovery leaves other SoCal counties in the dust

Before end users can provide sufficient support for the housing recovery, they will need to acquire income in the form of jobs and wage increases. San Diego continues to outpace the state’s jobs recovery, which is clearly good news for San Diego’s housing industry.

The number of individuals employed in San Diego County in the second half of 2015 saw a rapid increase from one year earlier. Unlike much of the state, San Diego has far surpassed the level of jobs held prior to the 2008 recession. However, with the working-aged population increase of roughly 250,000 individuals in San Diego County since 2007, the real jobs recovery which will bring on mass wage increases isn’t expected until around 2018. Home prices will follow that increase.

Industry employment gives mixed signals

The largest employing industry in San Diego County, Professional and Business Services, has nearly returned to pre-recession levels. Meanwhile, San Diego’s third biggest industry, the Goods-Producing sector, has moved only a negligible amount toward recovery since the recession ended in 2009.

In the housing industry, construction jobs took a huge hit and have just barely started the recovery process. Likewise, the number of employed real estate professionals has remained low throughout this recovery and will not likely increase until the next confluence of buyers and renters (members of theGeneration Y and Baby Boomer generations) converge and enter the market around 2019-2021.

Per capita income has recovered

The average per capita income in San Diego County is $51,459 as of 2014, the most recently reported Census year. This shows an average increase in income of 3.1% over 2013. Income took a hit in San Diego during the recession, and it took three years for income to finally catch up to 2008 levels.

After factoring in an additional 8%-9% increase in income needed just to cover eight years of interim inflation, homebuyers in 2014 had only slightly higher purchasing power to buy a home or rent as they did in 2008 – all else remaining unchanged. Per capita income in San Diego County remains slightly higher than the state average, and exceeds levels in the inland valleys by over 50%.

As long as income remains diminished across most job sectors, home prices and the price of rents are limited. This is due to the reality that buyer occupants ultimately determine selling prices in this economic environment  — buyers can only pay as much for a home as their savings and income qualify them to pay — nothing more, unless lenders and landlords want to take on more risky, less qualified individuals. The same fundamental truth is also applicable to tenants’ capacity to pay, which ultimately works to set the ceiling on rental amounts.

Expect per capita income to rise with increases in job numbers. When considering the jobs needed to cover population growth of one percent per annum in the years since 2007, it will take until 2019 for employment numbers and income to again drive demand for significant additional new housing.