U.S. NEWS: SAN DIEGO HOUSING MARKET FORECAST
Home prices and rents likely to remain unaffordable as long as new construction is thwarted.
With its enviable weather and coastline, consistently strong job market and highly ranked universities, it's easy to become enraptured by San Diego and decide to move here. But with so many others feeling the same way, has California's second largest city become a victim of its own success?
Defined by a geographic footprint penned in on four sides by the Pacific Ocean, Camp Pendleton, mountainous terrain and the Mexican border, if this region of over 3 million people wants to continue attracting jobs, its growing legion of NIMBY (not in my backyard) activists may soon have to choose between higher-density neighborhoods allowing more homes or economic stagnation.
As with many other housing markets in the U.S., home prices jumped in the San Diego-Carlsbad metropolitan statistical area from mid-2020 to mid-2022 as mortgage rates reached historic lows. Since then, while median home sale prices have fallen as mortgage rates jumped, in more recent months the housing market here has shown signs of leveling out even if listings remain well below historic norms.
Using information from the U.S. News Housing Market Index, we’ve compiled the data you need for a better understanding of the San Diego metro real estate market in 2023.
How the San Diego Housing Market Changed in 2022
The number of monthly single-family detached home building permits ordered in San Diego steadily rose in the first five months of the year to reach 466, or the highest level since May 2018. Over the rest of the year and into January this pace slowly fell to under 150 units, a decline of 68%. While they fell 54% year-over-year, during the three-month period ending in January 2023 versus the same months of a year earlier, the number of single-family detached permits issued fell by a lesser 32.7%.
For the multifamily sector, its permit issuances didn’t peak until August 2022 at 642 units, the highest monthly level since December 2020. Since then, developers have pulled back on the number of building permits ordered, falling to about 450 units by January 2023. During the three-month period ending in January 2023, 18.8% fewer multifamily permits were requested versus the same months ending in January 2022.
San Diego Housing Supply and Demand
The supply of housing in San Diego, which had dipped as low as 0.70 months in March 2022, continued edging up through the rest of the year. Although more homeowners took advantage of rising home values and a strong seller’s market, inventory still remained very low. After peaking at 2.31 units in October, housing supply fell to 1.85 months in December before rebounding to 1.9 months in January 2023. However, early signs show inventory falling back closer to 1.5 months in February.
For just the month of January 2023 year-over-year, the supply of homes for sale rose by just over one month, or an increase of 120%. Still, that level of supply is a fraction of the months of supply for the overall U.S. in January at 3.21 months, which rose 1.71 months year-over-year, or about 114%.
Robert Schantz, a real estate leadership coach who also manages two Keller Williams franchises in downtown San Diego and Mission Valley, reports that the first-time buyer market for existing homes has mostly disappeared in the region and is made worse by constant lawsuits against new construction.
“I’m tracking 158 proposed developments which are all involved in lawsuits,” he says. “The only thing they’re building in large numbers is a lot of condos, and they get around the lawsuits by making them rentals for 10 years with really high rents.”
In terms of geographic demand, since homes closer to the coast have held onto more of their gains, better deals might be found to the inland north, east and south. “The further you go inland, the more you lose in value,” says Schantz. “But it’s also hard to gauge opportunities because inventory is so low, but people really need single-family homes, and we’re still absorbing more than we’re listing. In early March of 2023, the number of units in the MLS was the lowest it’s ever been.”
When new homes are available, they do sell quickly in the region, at least according to Evan Forrest, vice president of Zonda Advisory. “After reaching a trough last November, in December we got back to pre-pandemic numbers, with San Diego coming back with the strongest new home sales rates (in Southern California) when it’s usually a younger sibling compared with the Inland Empire.”
In the rental market, while there has been some new rental stock, San Diego’s vacancy rate of 3.2% reported for December 2022 by the Census Bureau still fell 0.4% year-over-year. If a vacancy level of 5% is generally considered to represent rental market equilibrium between supply and demand, San Diego is both a seller’s and a landlord’s market. While certainly an improvement from just 2.5% in July 2021, the vacancy rate in San Diego has remained under 5% since January 2021.
In addition to the low inventory, sales activity in the months ahead may also be impacted by rebounding mortgage rates resulting from stubborn inflation. Although inflation is slowly trending down, it’s still too high for the Federal Reserve, which hiked its federal funds rate another quarter-point in March.
According to the seasonally adjusted Purchase Index from the Mortgage Bankers Association for the week ending March 24, although purchase applications did rise for the fourth consecutive week, they were still down 35% year-on-year. With mortgage rates tracked by the MBA up 1.65 basis points for the same period, many buyers and sellers remain on the sidelines awaiting further rate declines.
Consumer sentiment as measured by the University of Michigan’s Survey of Consumers rose to 64.9 on a 100-point scale in January but was still down 2.3 points year-over-year. Notably, while the sub-index measuring Current Economic Conditions for January was higher at 68.4, the Index of Consumer Expectations was lower at 62.7.
With such low unemployment and most existing homeowners benefiting from low mortgage rates offered in 2021 and part of 2022, both foreclosures and delinquencies tracked by Black Knight remain at very low levels in California.
As of December 2022, just 0.10% of homes in the state were in foreclosure versus 0.37% for the nation. Although statewide delinquencies in December fell 0.3% to 1.8% versus just over 3% for the U.S., most delinquencies do not make it to the foreclosure process as quickly as they did during the financial crisis.
Median Home Price in San Diego
For buyers, a small but growing timeline of homes for sale in the latter half of 2022 helped to lower prices, with the median sales price falling 1.3% year-over-year in January to $770,000. While this median price has fallen 12.6% from its peak of $877,000 last April, it's still more than two times the national median of $383,000, making it difficult for first-time buyers to grab that first rung on the homebuying ladder without having high incomes and significant savings for a down payment.
However, for newly built homes, potential buyers might snag a better deal than they could with existing resale units, especially for standing inventory. “If the friction point between you buying a home is affordability and rising interest rates, we’ve been solving that by locking in rates or buying them down,” explains Jimmy Ayala, division president of San Diego for Tri Pointe Homes. Currently focused on building in the northern and southern parts of the county in Fallbrook and Otay Mesa, respectively, Ayala says today’s buyers are focused much more on an affordable monthly payment than on the price point alone.
He also agrees with Schantz’s observation that new homes for sale are much harder to come by in San Diego. “We probably have half the number of open projects than we did 10 years ago. Besides being penned in by geography, we also have tremendous opposition to new development.”
Although home prices did continue to rise through April 2022, they peaked five months earlier in the year than median rental rates, which continued to rise through September to $3,087 per month. Since then, although area rents continued to slide to $2,966 by January 2023, they're still up 8.5% year-over-year and 31.1% from January 2020.
With the Census Bureau's American Community Survey reporting 1.16 million households as of December 2021, "America's Finest City" has continued to grow steadily due to its strong employment market as well as a climate ranked among the best in the country. In the two years prior to the end of 2021, the region grew by nearly 31,000 new households, or over 15,000 per year.
Nationally, while costs for new single-family homes as reported by the Census Bureau's Construction Cost Index for January have retreated from their November peak of 195.5, they're still up 12% year-over-year to 190.6.
While average mortgage rates tracked by FreddieMac's Primary Mortgage Market Survey did retreat from their peak of 6.90% in October to 6.27% in January, as of March 23, 2023 the rate for a 30-year fixed rate loan rebounded to 6.42%.
Unemployment Trends in San Diego
Despite its chronic housing shortage, the San Diego economy continues to outperform the country, with non-farm employment in December 2022 rising by over 50,000 year-over-year to almost 1.55 million jobs. Moreover, the local unemployment rate for December fell 1.2 percentage points year-over-year to just 2.9% versus the U.S. average of 3.5%.
Of the 50,500 annual rise in the total number of jobs, the fastest-growing fields included leisure and hospitality (10.7%), other services (9.3%) and education and health services (5.8%). Due in part to the region’s relatively anemic new construction, although jobs in this field did rise by 2.0% year-over-year through December, they accounted for just 1,700 jobs.
Zonda’s Forrest suggests that the lack of new entrants into the construction trades is as much at fault as regulation and no-growth NIBMYs for the reasons San Diego is not keeping up with population growth. “While more people go into tech, construction is hard but one of the most rewarding things,” he says. Forrest, who comes from a construction background, argues that the housing shortage in San Diego and other markets nationally is also due to an industry not effectively showing the value and rewards of a construction career, not replacing the number of workers who have departed in previous years, and a lack of apprenticeships.