San Diego boasts one of the healthiest economies in the United States and the real estate market is following suit. The unemployment rate in the area enjoyed an overall drop from the previous year, and the median income for San Diego residents rose from the previous four years. Additionally, California has enjoyed a growing and lively economy for much of the past several years. Like almost all products and services – the housing market is largely dictated by supply and demand. A healthy economy generally leads to an increasing population, and therefore an increasing demand. While no one can exactly predict the economy (although most economists predict a good 2018) and when housing prices will go up and down, if this upward pressure on demand continues to not be met by an increase in supply, there is a strong likelihood that housing prices will continue to rise.
On the supply side, San Diego is not building enough housing to keep up with demand – plain and simple. This is according to every real estate economist I have heard or personally spoken with to over the past few years. One day I will write a whole blog on post on why I believe this is, but for now just know this:
We have limited land and high construction cost in San Diego. Permitting and impact fees are very expensive, and most neighborhoods fight adding new housing (more traffic, less open space, etc).
So if you combine all of those reasons, you see there will likely be a continued upward pressure on housing prices for 2018. This was the case in 2017 when the median price of a home rose by nearly 7% in 2017. The factor that will keep the growth moderate is our next topic.
Mortgage rates grew to 4% in 2017. 2018 is set to see another rise in mortgage interest rates. The current model predicts a rise to 4.3%. This figure is still drastically lower than the historical averages, but it is noteworthy to those looking to buy in the San Diego area.
Interest rates have a strong influence on pricing, especially in entry and middle class homes. Most purchasers of these homes obtain mortgages and monthly payments are of course very sensitive to interest rates.
Interest rates go up as bond rates go up… and bond rates go up as a result of the economy predicting inflation and as the Fed raises their rates. Therefore, if the economy as whole experiences inflation as whole (including housing) the increases will likely be kept in check by rising interest rates.
San Diego is one of the fastest growing cities in California. Currently, the only California city to exceed San Diego in population increase has been Los Angeles. The official population of San Diego in 2017 was estimated at 1,339,000 residents. That is a significant increase from 1,322,000 people in 2014. The growth is expected to continue in 2018, with many predicting the population to reach as high as 1,350,000 by the end of next year.
A growing population means that more people will be looking to buy homes. Obviously, this will play a key role in the continued rise of median home prices. The increased population will also help the economy to continue to see a healthy amount of growth for 2018.
Median Home Values
2017 saw home prices rise dramatically compared to the national average. Last year, there was a 7.2% increase in the median price of a home in San Diego. As we have discussed, there are several factors for this increase, most notably a healthy economy and a growing population. This was right in line with the state average for California.
While 2018 will see a continued rise in median home prices in San Diego, the increase will be far less dramatic than in previous years. I predict a rise more in the range of 3 to 4% for median home values in 2018. Since San Diego is in the much heavier populated southern portion of California, this is a good indicator of what the overall state increase will look like. This doesn’t mean that homes will be priced too high to merit a smart loan, it simply means that the market is healthy and more adapted to the seller. Positive purchases can still be made in the healthy San Diego economy.
Rent Prices for 2018
No matter how you slice it, San Diego is an expensive place to rent when compared to the rest of the nation. When compared to the rest of California, however, it is right in line with the averages seen in the rest of Southern California.
According to Rent Jungle, the average rent in San Diego county is $2,063 and 2018 is predicted to see a further increase. The factors that contribute to the increasing rent prices in the area are largely the same as the factors effecting the housing market as a whole. Landlords can put higher rent prices on homes because they know there is limited supply and that someone will pay it. We have seen some rental housing being built but primarily in the downtown and center city area. This supply is also not keeping up with demand.
Increasing mortgage rates will usually translate to higher rent prices. This trend isn’t necessarily specific to San Diego itself, but rather then housing market in general. A healthy economy means that all of the pieces can fall in to place.
I feel the San Diego housing market pricing will experience moderate but steady growth in 2018. While the national economy as a whole is due for a correction, the fundamentals of limited supply and a high demand to live and invest in San Diego will keep home pricing strong. I don’t see an eminent risk of oversupply and quickly dropping prices as in the last correction. The one thing to watch is if inflation really takes off and interest rates rise quickly. However, our current pricing seems to be on stable ground and should slowly and steadily grow.
Thank you for taking the time to read my San Diego housing market forecast for 2018. If you have any questions, don’t hesitate to contact me.