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San Diego Housing Market - The Hidden Time Bombs

By Bob Schwartz, CRS, GRI 2005 All rights reserved. 11/06 - Updated from original published 12/04

Nothing down, variable interest rate, EZ qualification, stated income. These are the common lending terms that many believe have kept our super-heated market going. As the stories of fast home appreciation proliferate, the desire to get into our local housing market by those who hesitated in the past, have escalated.

This is typical of any bull market, be it the stock or housing market. The paradigm changes this time. There is a huge increase in zero down and adjustable rate loans being pushed on poor credit risk borrowers and first time buyers (below market start/qualifying), as well as move up buyers being induced to purchase homes that otherwise are far beyond normal qualifying loan guidelines!

The majority of the new adjustable loans have artificially low start rates for the first year or two, interest only payment terms, and are indexed to volatile interest rate indexes. This is setting the stage for a huge decline in home values.

One San Diego real estate local major lender recently stated that they had no fixed rate purchase loans in process; all their new purchase loans were adjustable! Further, over 50% of their new purchase loans were zero down! Combine this with the popular 'stated income' loans and it's easy to see how these policies have kept our market propped up. (A stated income loan basically means if the buyer has good credit, the amount of their stated income is NOT verified for qualification purposes.)

While a huge housing value decline seems unnatural to many, this phenomenon was last seen in the San Diego real estate market in the mid-90's! At that time, an approximate 20% housing depreciation took many by surprise. The easy loan practices today, the double digit housing appreciation of the past few years, and irrational enthusiasm, clearly signals another approaching decline in the San Diego housing market!

How bad could such a decline be? A number of local lenders state that the majority of their loans for the past few years were zero down, adjustable loans. With the slow but steady rise in interest rates, San Diego real estate could be facing a decline in housing values that could dim the 20% decline of the mid-90's!

By any measure, our local San Diego real estate market is more at risk than any time in recent memory.

Though housing bubbles may last far beyond anyone's expectations, now may well be a time to reconsider any new purchase. Purchasing one's first home is not something one should try to time or tie into projections on the local housing trend. Just be cautious! Stay well within your normal qualification ratios. Except under certain conditions, avoid E/Z qualification and adjustable, zero down loans. Start out modestly with a smaller home or condominium that you can easily afford.

No one can predict the future trend of any major market with certainty. However, caution is advised in San Diego housing as the multitude sing the siren song of never ending double digit housing appreciation.


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