Real Estate Bubble | Buying A House In San Diego

The housing market is absolute fire right now. Housing market gains in San Diego and pretty much the entire country finished up over or around 10% for 2020, for most major markets at least. That is insane, especially considering we were in the middle of the worst global pandemic we have ever seen in our lifetimes.

Today we are going talk about the incredible housing market right now in San Diego and if we are in a major housing bubble that is about to burst! Specifically, I’m going to be referencing San Diego but the statistics and fundamentals will apply to just about every market throughout the country right now. The major ones at least.

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So when we talk about real estate bubbles, we usually start with comparisons to 2008 which was absolutely brutal for most homeowners. There were the foreclosures, then came the short sales. It was a very difficult time to be a home owner. Especially if you fell into difficult financial circumstances. That was coming off massive gains in previous years. Housing in 2003, 2004, 2005 looked like it would never come back down. But then it did.

So here we are in 2021, same thing is happening, this is complete déjà vu right? Well I’m going to walk you through exactly why this current market is not anything like that previous market and why I expect prices to not only remain steady but actually increase this year and for the foreseeable future.

Low Housing Supply

Reason number one I want to talk about is going to be the supply of homes available to buy. If you are a home buyer right now, you know what I mean. You either had to put in bids on multiple homes, fought like heck in multiple bidding wars, and hopefully you ultimately prevailed. If not, you will just stay persistent, it will happen.

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So here’s the deal: In real estate, supply and demand are measured in “months’ supply of inventory,” which is based on the number of current homes for sale compared to the number of buyers in the market. I usually look at it in segments. A seller’s market usually falls somewhere in 1 to 3 month range (maybe 4 if you want to push it). A normal months’ supply of inventory for the market is about 4 to 6 months. Mid 5s is what most people consider balance in the market. Anything above that is going to be a buyers’ market, indicating prices will usually start to soften. So anything inside that 1-3 month range is usually a sellers’ market in which prices normally appreciate.

In San Diego, and most of the country, the months’ inventory has been low for years. Usually somewhere near 2 – 3 months. Ready for this? Currently we at sitting at just over 1.1 months inventory! Another significant drop and we could reach zero homes for sale. That is absolutely mind blowing to me. Sellers’ market is an understatement at this point. Price increases are inevitable.

Compare this to 2006 and 2008, the months’ supply of inventory increased from just over 5 months to 11 months. The months’ supply was over 7 months in twenty-seven of those thirty-six months, yet home values continued to rise! Very strange times. The writing was all over the wall for that crash.

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Remember, if supply is low and demand is high, prices naturally will increase. Supply right now is incredibly low. About as low as we have ever seen.

Irrational Exuberance

Reason number two that I want to discuss has to do with something referred to is a term I recently came across and I think is perfect.

“Irrational Exuberance” or unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors.

Basically people in the early 2000’s got caught up in the frenzy and bought houses based on an unrealistic belief that housing values would continue to escalate. Monkey see monkey do kind of stuff. It got worse. The lenders bought into the notion as well. Borrowing money became as easy as breathing and having a pulse. Anyone could borrow money. I mean anyone. Did you see the big short? They did a great job of capturing this.

Compare that to today were money is not easy to borrow. What I mean specifically is borrowers are qualified today. They have to be qualified or no mortgage loan approval will be happening. If you’ve been through a mortgage approval process you know what I mean. Lenders learned valuable lessons 10 year ago. They leave no stone unearthed when assessing your ability to repay your loan. In addition, the majority of today’s buyers are living in the home. There are investors out there as well but not nearly as much. This is not fabricated demand. These are homeowners taking advantage of the lowest mortgage interest rate we have ever seen, buying a home, and living in it with their families. Very different than the typical buyer and intent in 2008.

These buyers are real, the housing supply is low, and the demand is high, prices are naturally increasing.

People Have Equity

Reason number 3 is going to be important. You need to understand we are at a point in history when people have more equity in their homes than ever before. This is a crazy stat I just saw. According to Census Bureau data, over 38% of owner-occupied housing units are owned ‘free and clear’. 38%!!!!

Combine that with 18.7% of all homes that have at least 50% equity or more. That’s significantly better than the equity situation in 2008. In 2008, when people treated their homes like ATM machines. Equity lines of credit were everywhere. When home prices crashed then, people had negative equity. Then came the massive foreclosure run most of us are familiar with.

Here’s the bottom line… As far as any real estate bubble talk for 2021, our housing supply is at an absolute historic low in San Diego (and everywhere else). Demand is real and highly motivated. Even if there were to be a drop in prices, homeowners have enough equity to be able to weather a dip in home values. This is nothing like 2008. In fact, it’s the exact opposite. If you are waiting for the bubble to burst, its probably not going to happen anytime soon. Could it happen in 2021? Absolutely! I don’t have a crystal ball. Do I think it’s going to happen in 2021? Absolutely not.

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