Reports of California's Demise are Overblown

After unprecedented levels of price appreciation, the San Diego market has returned to normal market conditions. Three factors have contributed to the softening of the market:

• Increasing competition from builders
• Increasing competition from condominium converters
• Increasing competition from resale listings

While some overpriced situations exist, market demand and supply is largely in balance. The 19,400 jobs created in the last 12 months exceed construction levels by 23 percent, which is a healthy demand/supply level.

Affordability is a major problem in San Diego, with a median resale home price that now exceeds $550,000. The slowly declining resale volume in San Diego supports the notion that entry-level buyers are being priced out of the market.

The market is very competitive for builders. Buyers have choices, and will purchase the homes that offer the best design and best execution. Lot and view premiums are likely to be declining. This is a time for San Diego builders to be fine tuning their operations, but not panicking. The economics for San Diego dictate a "B" housing market, so the currently soft housing market is likely to correct itself in 2006.

Sacramento recently cracked the list of the top 20 housing markets in the country, with 21,110 permits issued in the last year. Our short-term outlook is a "D" because of the high levels of supply and historically poor affordability. However, we are very bullish on Sacramento over the long-term because it has the following:

• Jobs — A strong employment base, including Hewlett-Packard, Intel and other operations that are within two hours of Silicon Valley
• Affordable Housing — At a $400,000 resale median home price, Sacramento is still affordable by California standards
• Accessibility — The recently expanded airport is within minutes of downtown and two of the country's largest freeways (I-5 and I-80) intersect in Sacramento
• Land - Thousands of acres of undeveloped agricultural land are within a reasonable commute of the employment centers. Local developers complain about the entitlement woes, but development restrictions are much less severe than in the larger California markets. Flood issues keep much of the raw land from being developed, but we anticipate that levee and other improvements will solve these problems over time.

Sixteen of the top 25 Giant builders in the country have moved into Sacramento in the last few years, making it a competitive market. However, all 16 are likely to do well, at the expense of the small builder.

jburns@realestateconsulting.com [1]