Chill Out San Diego: A Note of Optimism for Prospective Homebuyers

San Diego has perfect weather, awesome beaches, and amazing local breweries. It also has a lot of stressed-out homeowners. According to a recent study by Lending Tree, as highlighted in the San Diego Tribune, “nearly 40 percent of San Diego homeowners were spending a third or more of their income on mortgages and other associated costs.” It is easy to see why when you look at home prices over the past decade:

First time homebuyers who entered the market from 2009 through 2020 have a lot of great stories to tell. Buyers from 2009 to 2012 have seen their home prices double. When you deal with the 5-to-1 leverage implicit in a home purchased with a 20% down payment this means their home equity increased by an astounding amount.

But, pause for a moment and consider those homebuyers who were imbued with the same sense of FOMO in 2006. After home prices sky rocketed for a decade, prospective buyers had that same feeling as today: “if we don’t buy now, we’ll never be able to afford it!” Those homeowners were underwater for 12 years. They saw their home prices plummet below what they paid, only to finally recover over a decade later. Additionally, they paid massive amounts in interest and property tax along the way. No less than the co-creator of the index above, Robert Shiller, had sage words of wisdom for prospective homebuyers today:

“We have a lot of upward momentum now. So, waiting a year probably won’t bring house prices down. If you go out three or five years, I could imagine they’d be substantially lower than they are now, and maybe that’s a good thing. Not from the standpoint of a homeowner, but it’s from the standpoint of a prospective homeowner. It’s a good thing.”

Shiller is counting on the old adage holding true: "there is no cure for high prices like high prices." The self correcting mechanism from too high of prices comes from two factors: 1) a buyer's strike as they wait for prices to fall and 2) the incentive to create more supply, in this case homebuilders build more homes. Unfortunately, in California it's incredibly difficult to build more homes, especially in the most desirable areas. 

If you are a renter a great strategy today could be to keep renting for a while longer, save and invest your savings until the market cools off. Most of your housing payments in the first five years of a thirty year mortgage go towards interest and not principal paydown anyway. It is common to think about renters “throwing away money,” but homeowners are doing the same thing on interest payments. So, go surfing, drink a beer, invest your money. Your time to get the home of your dreams could be just a few years away.