It’s that time of year again. We are nearing the end of 2011, and 2012 looms on the horizon. So it’s time for us to review the top metropolitan real estate markets in the U.S. In this segment, I’ll be tackling San Diego home prices and other real estate trends in the city. I’ll offer some personal predictions for the San Diego housing market in 2012, as well.
San Diego Home Prices: Looking Back
It wasn’t a stellar year for the San Diego real estate market, in terms of home prices. The Case-Shiller Home Price Index released on October 25, 2011 showed a price decline of -5.5%, from August 2010 to the same month in 2011.
The annual numbers do not inspire confidence. But if you look at the more recent monthly data, you could make an argument that San Diego home prices are actually bouncing along the bottom. (I won’t be making that argument. I’m just saying you could.) For example, prices in the metro area rose 0.1% from June to July of 2011. This might have been a normal seasonal pattern, since home-buying activity generally picks up in the summer months. Or it could be the start of a new era with more price stability. It’s too soon to tell, as evidenced by the -0.2% price drop in the following month.
Zillow’s home value index shows a similar trend. San Diego home prices fell steadily as the housing market imploded, but then turned north again in 2010. This was an artificial uptick largely fueled by the California home buyer tax-credit program. That program expired in the latter half of 2010. You can see the corresponding downturn in San Diego home prices.
Take away the artificial stimulus of the tax credit, and the housing market continues along the downward path it was on previously. The question is, how long will the downward trend continue? Will it carry over into 2012? Here’s my prediction for the San Diego housing market in 2012:
Predictions for the Housing Market in 2012
Unemployment and housing inventory are two of the biggest problems for the San Diego real estate market. This will likely continue for the first half of 2012, if not for the entire year.
In the San Diego area, unemployment has been hovering close to 10% for months. According to the UCLA Anderson Forecast on economic growth, the San Diego area will see some degree of job growth in 2012, but not enough to bring down the unemployment rate. This will continue to limit the pool of qualified home buyers, which puts downward pressure on San Diego home prices by reducing demand.
You can see in the graph above that San Diego’s unemployment has been tracking above the national trend for the last few years. This is likely to continue in 2012.
Foreclosure Rate and Bank-Owned Homes
It’s not pretty on the supply side of the equation, either. Excess levels of bank-owned foreclosures have further skewed the supply-and-demand picture. In the third quarter of 2011, there were approximately 4,979 foreclosure starts in San Diego (source: RealtyTrac). These are homes that are just entering the foreclosure process. This puts San Diego in the top five of U.S. cities, for total number of foreclosure starts during that period. Also in the top five were Los Angeles, San Francisco and Sacramento. Southern California really led the charge in this category, but not in a good way.
Most of these distressed properties will come back onto the market as bank-owned homes in the months to come. Bank-owned (REO) properties are often sold below market value, which adds insult to injury in the housing market.
Both of these factors, unemployment and inventory, will continue to threaten home prices next year. That’s why it’s hard to find any positive predictions for the San Diego housing market in 2012.
There are predictions for modest economic growth in the San Diego area in 2012. But the unemployment situation is likely to remain where it is now, and this will continue to limit the number of home buyers entering the market. Some economists have predicted that job growth in San Diego will pick up in the summer of 2012. Even so, this wouldn’t impact the housing market for some time. People don’t get a new job and rush out to buy a house the next day. So the effects of any job growth in the latter part of 2012 will have a delayed impact on the San Diego housing market and home prices.
Further Price Declines Ahead?
Based on all of this, my prediction for the 2012 San Diego real estate market is more of the same. I don’t think we will see any significant price declines. But I wouldn’t be surprised to see home prices drop another 2% in 2012, when compared to 2011. Somewhere between flat and -2% would seem to be a fair prediction. If job growth exceeds current expectations, I might be proven wrong. As a San Diego resident, I would gladly eat my words, if it meant an upturn in local property values. It just doesn’t seem likely.
Disclaimer: This article includes comments pertaining to the future of home prices in San Diego. These predictions represent our best guess for the future of this housing market, based on current trends. In other words, it’s an educated guess — and nothing more. No one can predict what will happen in the coming months with 100% accuracy. So please do not make any financial decisions based solely on the information presented here.