San Diego Housing Costs Expected to Keep Rising

San Diego County Business Editor

The cost of housing in San Diego County will continue to rise rapidly this year, although at a somewhat slower rate than in 1988, several housing experts predicted last week.

The same market factors that drove prices to unprecedented heights last year--the shrinking supply of new housing in the county’s subdivisions combined with rapid population and job growth--remain realities in 1989.

Those realities helped generate 18% and 23% increases, respectively, in the average prices of resold houses and new single-family houses in San Diego County in 1988. And chances appear excellent that San Diego will retain the distinction it garnered in 1987 of being the least affordable housing market in the United States.


Housing will continue to get more expensive this year, if only because rapidly escalating lot prices will be passed along to home buyers. The average cost of a finished, 5,000-square-foot lot in the county is now $100,000, up from $65,000 last year, said Bill Fontana, president of Westana Builders, a San Diego home builder.

The escalating prices, which have stunned home buyers and builders alike, recall the go-go housing market of the late 1970s. “It’s like deja vu. You go to a cocktail party and all people are talking about is how so-and-so sold their house for some unbelievable price,” Fontana said.

Very Low Supply

The upward price spiral can be traced to the exceptionally low supply of new housing in San Diego County relative to demand, said Will Malone, a consultant with La Jolla-based Meyers Group, a real estate research firm. As of Dec. 15, there were only 1,916 new houses and condominiums available for sale in the county, down from 3,444 units on the market a year ago. The inventory of unsold new housing amounts to a 45-day supply, Malone said.

“There’s greater demand for less supply,” Malone said, noting that the county’s population has grown by 25% since 1980. “When there are more buyers for less inventory, prices go up.”

As the supply of new housing diminished, buyer demand was growing in 1988, as evidenced by the increase in the county’s population by about 75,000, or 3%, said Max Schetter, director of research at the Greater San Diego Chamber of Commerce. The chamber is predicting that will grow 60,000 in 1989.

The county’s current population of 2.4 million has grown by 100,000 since July, 1987, and by 430,000 since July, 1982, Schetter said.

Also, the county’s economy is spinning off more and more prospective home buyers: About 42,000 jobs were added to the county’s employment base in 1988 as the unemployment rate dipped to 4.3%, the lowest rate in 14 years, according to the state Employment Development Department. The San Diego region’s economy grew at a 5% rate adjusted for inflation, ahead of the state and national rates.

San Diego’s prosperity and appeal as a place to live have played leading roles in the price increases, said Arthur Kartman, a professor of economics at San Diego State University. “Prices are higher because people are willing to pay them. When people say houses are unaffordable, that’s not right. Because someone is affording them,” Kartman said.

Supply-Demand Imbalance

Although demand for housing was fanned in 1988, only 27,000 housing unit permits were issued countywide in 1988, significantly fewer than the record 43,561 permits in 1986 and roughly equal to the average permits issued annually over the last 11 years, Schetter said. He expects the number of housing permits to increase to 31,000 in 1989.

Largely because of the supply-demand imbalance, the median asking price of new houses in San Diego County subdivisions on Dec. 15 was $205,000, or 37% higher than the median price a year previous, Malone said. The median price is the point at which half of all prices are less and half are higher.

The average price of new single-family units actually sold in the county during the three month period ended Sept. 30 was $208,000, a 23% increase from the same period in 1987, said Russell Valone, president of Market Profiles, a San Diego firm that tracks subdivision sales. The rate of increase was more than twice the 11% annual increases that the county’s subdivisions averaged from 1984 to 1987.

The supply of new housing within San Diego’s city limits has been kept low by the city’s interim development ordinance (IDO), a measure that capped development in San Diego at 8,000 homes for the 18-month period beginning Aug. 21, 1987.

After a three-month extension, the IDO is now due to lapse in May. But observers, including Schetter, doubt that a flood of new building permits will result once the IDO goes by the boards.

Housing industry officials say they have noticed an easing of market activity since the November defeat of growth-control ballot measures in several of the county’s municipalities. Pointing to the ballot measures’ defeat, Rick Jarrett, president of TCS Mortgage of San Diego, believes housing prices will increase by no more than 10% or 12% in 1989.

Speculative Frenzy

Fears that the November ballot measures would pass and lead to permanent limits on construction fed a speculative frenzy last summer and fall, pushing the average resale price of a San Diego house to $191,000 in November, a 27% increase from November 1987, according to the San Diego Board of Realtors. Most of the sales that closed in November opened escrow in September and October, before the election.

The recent price increases remain something of a puzzle to Kartman because they are so far in excess of the current 4.5% inflation rate. The price spiral of the late 1970s, on the other hand, was more closely tied to inflation rates of 10% to 12% in some years, he said.

As if the housing-price spiral weren’t enough, rental costs may also be poised for big increases in coming months. The average vacancy rate of apartments surveyed by the Chamber is at a low 5.4%, down from 9% a year ago. Low vacancies are frequently precursors to rent increases.


San Diego County building permits in residential units, single and multiple unit projects combined:

1978: 28,148 1979: 19,555 1980: 12,942 1981: 9,293 1982: 7,697 1983: 21,308 1984: 33,399 1985: 39,121 1986: 43,561 1987: 31,327 1988: 27,000* 1989: 31,000 * * Estimate SOURCE: Greater San Diego Chamber of Commerce.