The Burnham-Moores Center for Real Estate at the University of San Diego (USD) School of Business held its 18th Annual Residential Real Estate Conference Thursday, which revealed the pros and cons of this sector of our market both nationally and with respect to San Diego. Norm Miller, PhD, Hahn Chair of Real Estate Finance at the USD School of Business, who is affiliated with the BMC, spoke with SoCal Real Estate just before the conference to give his main takeaways.
“The market is slowing and softening; however, we are not yet seeing any housing bust nor any prices going negative,” Miller tells us. “There are more price adjustments in the single-family market but few price declines. If interest rates increase again, that will put downward pressure on the lowest half of the price tier.
Miller says the recent election will have very little impact on Southern California residential real estate for now, although more relevant is the closure of the border at San Ysidro. “That will cost us billions with labor shortages (contractors, hotels, farmers, landscapers, and some in the higher-paid professions) and some losses in local visitor consumption.”
Going into 2019, Miller says he believes the market will soften and a few markets may go negative, but the upper price ranges will be stable or flat, overall sustaining very small price declines. “In 2020, when we have a tariff war, induced recession prices could decline overall in San Diego and especially Seattle, Miami, San Fran, and L.A. They have already declined in NYC, Miami Beach a little, and a few others.”
Overall, our biggest problem is a lack of supply, which is constrained by height limits that are too low (30 feet often near the coast), Miller points out. “It should be 37 feet so we could have above-ground parking. Limits on density based on NIMBYs are problematic, and there are ridiculous parking requirements for new developments or retrofits. We do not need more subsidies, rent controls, and inclusionary zoning, which will make the affordability problem worse in the long run.”
He also notes that the lower corporate tax rates have made low-income tax credits for housing less valuable, which is making it more expensive to develop subsidized affordable housing. “The new tax laws that limit deductions for property taxes, state and local taxes, and even new mortgages ($750,000 limit) are all going to hurt housing and ownership starting in the 2018 tax year. It will hit owners or would-be owners harder in April of 2019, but this will be a big hit on the higher-income households and may even increase our exodus of residents out of California.”
During the conference, according to the representative, Tim Sullivan, managing principal of Meyers Research, gave a statistical overview of the residential sector. He said that in summary, the market is doing just fine, with relatively flat rents and existing home sales down 2 percent to 3 percent from 2017.
New sales aside, he said September and October were weak, and the holidays and interest-rate increases have not helped the sector. bad Sept and Oct and other bad news through end of the year with holidays and interest rate increases. But Sullivan’s main takeaway was, “Keep the perspective,” since most markets above the previous peak.
The event also presented a panel on the San Diego residential real estate market that included Miller, Nathan Moeder of London Moeder Advisors, and Deborah Ruane of Norwood Development Strategies. According to the representative, Ruane said she had been at the San Diego Housing Commission, but jumped out of the public sector and back into the private sector two months ago to help with affordable housing and to help “be the connector.” Her interest is the middle-income group.
Moeder said there is tremendous demand for single-family homes in San Diego, “and it is still needed because we’re not getting it done with multifamily.” He added that the market only increased its multifamily supply by 1,000 units, and with all of the restrictions on development, the market is not meeting housing needs. The plan is to stuff 40,000 homes in Temecula over 40 years to satisfy the San Diego need, which is not acceptable, he said. “There has to be a viable alternative in the market. It has to be a little bit of everything due to a multitude of housing preferences.”
Miller spoke of disruptions to the residential real estate market, including the national trade wars, which could trigger us into a recession altogether. He also said interest rates will be a disruptor over the next three to five years, as will technology.
Miller also spoke of Opportunity Zones and said the top four in the country are in California. This new incentive to develop in less-fortunate areas affords tax breaks to developers who follow specified rules and encourages long-term property holds. Miller said he is concerned about opportunity zones on the real estate side in that investors may overpay, and he advised potential investors to be cautious. “If you bought in an opportunity zone four to five months ago, okay, but now it’s too late.”
Moeder said more pro-housing action from the state is critical. “Funding for low-income Californians should happen.” He said he is optimistic that the California State legislature will step up a bit in 2019, and the new zoning rules might make it easier for people to add small accessory dwelling units on individual’s properties.