Housing ‘bubble’ a myth because economy too strong, say observers

As housing prices seem to be reaching unsustainable levels nationwide, there continues to be a belief in the presence of a housing “bubble” and its inevitable burst. However, San Diego Real Estate Agents say the belief is a myth since the market is a cyclical one in which change will always occur.

“This concept (the housing bubble burst) is dangerous because there’s a bandwagon that believes the market is going to change,” said Tim Sullivan, president of the Sullivan Group Real Estate Advisors, adding that he agrees there will be change. “Is it going to explode and pop? … No. We don’t believe the market is perfect. We do believe we’re in a cycle.”

Sullivan said a bubble can’t exist because one of the necessary criteria for a bubble, a fundamental shift in the economy, is not present and will not occur.

“If you only look at (gross domestic product), this implies our economy today is very solid (nationwide)” he said.

What has changed is the buoyancy in the market, the level of strength people have in a variety of characteristics that create the market dynamic. Some of the characteristics are more on a national level such as interest rates, media influence and the lending market; however, the impact on the housing market the other characteristics have varies depending on location.

“You have to pay attention to the fundamentals in the region (San Diego), and that’s really one of the main reasons we don’t believe in the bubble theory,” said Peter Dennehy, senior vice president with the Sullivan Group. “San Diego’s regional fundamentals are still very positive.”

Currently the county is growing in population by 40,000 to 50,000 people a year. This increase is corresponding with job growth, as Dennehy predicted 25,000 new jobs in the region this year and 30,000 new jobs in 2006.

“That is the underpaying for a healthy housing market,” Dennehy said.

Sullivan concurred, saying job growth is arguably the biggest factor in the housing market.

Total existing home sales in San Diego is also an indicator that there is a healthy housing market. According to Dennehy, existing home sales in 2005 will total 50,000 to 55,000, with 14,000 to 15,000 of those being new home units, which aren’t condo conversions.

“Historically that’s a great season,” Dennehy said, adding that total sales will be lower than 2004, exemplifying how cyclical the market is.

Of the new homes sales, 9,000 will be attached, while more than 4,000 will be single-family detached.

We’ll see new home sales actually drop off some, but we’ll see the resale market go up,” Sullivan said, mentioning that to determine the housing market he looks at total transactions, not just new sales. Also, the resale market is important because it is the affordable alternative for those who can’t purchase a new home.

This alternative is one solution to Sullivan’s largest concern, which is “how do we continue to fuel the market and keep entry-level buyers in the market?”

San Diego currently leads all Southern California counties in percentage of households able to afford a median-price resale home. Resale is typically 20 percent to 40 percent lower than a new home, according to Sullivan. However, affordability remains “not great.”

Another factor that aids those in the San Diego resale market and also makes for a healthy market is the current high inventory.

“It is one of our aces in the hole,” Sullivan said, adding that the city currently has four to five months of supply. He also predicted San Diego will see unsold inventory levels rise, which will help to soften price increases. The rising inventory also means buyers can select from a larger pool of products, which equates to more educated and thought-out buying decisions.

An example of the rising inventory is in downtown, where the area is becoming a growing resale market, according to Dennehy. Downtown has experienced 200 more total sales compared to last year, with an estimated 800 resales. Total inventory in downtown has doubled, but despite different price ranges for units, the location is more expensive than ever.

Aside from homebuyers and sellers, homebuilders are concerned about protecting their escrows, as some homebuilders are selling beyond their ability to deliver.

Regardless of the concerns, both Sullivan and Dennehy agreed that no bubble exists and the market is healthy and a big-picture cycle where patience and understanding are key.

“Perspective is important in the market,” Sullivan said. “We’re at a place where we’re supposed to be.”

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