In hindsight, 2002 was almost a perfect year for San Diego homeowners. We once again produced fewer new homes than needed to achieve a supply/demand equilibrium. That shortfall, when combined with rock-bottom interest rates, caused home prices to accelerate to new highs. That just about sums it up for homeowners. The problem is that homeowners are only half the households in the county. The rest of the folks rent and they didn’t have an almost perfect year. Here’s the story:

The county requires more than 17,000 new housing units each year to fill the needs created by new jobs. We have been gaining jobs steadily since 1994, and in 2003 there is a rather good chance that the new job count will be in the 25,000 to 30,000 range. The math is simple. We have 1.6 jobs per newly formed household and that means we should be producing about 17,000 new housing units just to accommodate new jobs.

That total does not include homes for the many folks moving to the area to retire and it does not include replacement housing. If we continue to replace only 0.5 percent of our aging housing stock each year, that adds another 5,000 units of demand. Replacement housing often is forgotten, but every year we have a multitude of housing units that are razed, burned down or converted to other uses.

How We Got Here

The problem in San Diego County is that housing production is governmentally restrained and has been for almost three decades. I will spare you the diatribe on errant housing policies, but suffice it to say that most cities work very diligently to limit the supply of new housing. And they are succeeding very well.

Almost all cities like to encourage high-priced single family homes. Conversely they discourage multi-family housing, both sale and rental, but particularly rental. They accomplish their prejudices against multi-family housing through down zoning or straight-arming any attempts to have multi-family housing approved.

The result, as might be expected, is the inability of the building industry to supply a well-rounded mix of housing. In 2002, local homebuilders produced about 9,000 new single family homes in San Diego County along with nearly 2,500 new condominiums and 2,500 rental units, a grand total of 14,000 units.

New homes averaged nearly $400,000, a slightly misleading figure because of the difference in ranges throughout the county. In South County, which accounted for almost one third of all new detached homes, the average price was slightly less than $400,000 while in north coastal county the average was approaching $750,000. And those totals do not include view premiums or upgrades.

On the condominium scene, about half the production was in Downtown San Diego. Newly permitted condominiums typically ranged in price from $250,000 to $750,000. The two latest properties to break ground were The Grande at Santa Fe, a 39-story mega-production by Bosa, and LaVita, a 304-unit high-rise by Intergulf/Lennar. Both projects are essentially sold out even though delivery is 18 months away. Both projects were designed by John Perkins, the visionary Canadian architect who also created the now-completed Discovery at Cortez Hill.

On the rental scene, apartment production has slowed dramatically with relatively few projects permitted in 2002. Almost half of the units approved in 2002 were in Downtown San Diego. The largest rental project to break ground Downtown was Watt’s Acqua Vista, a 23-story 382-unit giant. Five other rental projects also are in construction Downtown. To be economically viable, most will require rents on the order of $2 to $2.50 per square foot monthly; i.e., a 900-square-foot apartment will rent for $1,800 to $2,250, plus all utilities and often plus parking. It’s not aimed at the minimum-wage crowd.

If we look at the overall production of new homes and do the math, we were still short more than 6,000 housing units. Fortunately, there is south Riverside County. In 2002, 3,000 to 4,000 new homes were sold in Riverside to folks who work in San Diego County. New homes there average about $100,000 less than our homes in South County and infinitely less than in North County.

Admittedly, the Interstate 15 drive is obnoxious and time-consuming, but Temecula/Murrieta does offer the opportunity for young families to own a home in a very nice suburban environment. Of course, San Diego loses virtually all of the retail tax revenue and all of the property taxes from that group that now totals almost 100,000 San Diego job-holders. Not too clever of us.

A few words about the 50 percent who rent (many of whom will be lifetime renters). Balanced against national homeownership rates approaching 75 percent outside of California, San Diego looks pretty bad. The combination of the anti-rental development syndrome, an aging housing stock (the average apartment in the county is more than 40 years old), a proliferation of moderate-wage jobs and rising costs of operation, all augur poorly for the county’s almost 500,000 rental households.

Developers would like to build more apartments. Rest assured, if given the opportunity, builders would readily achieve a supply/demand balance in the apartment market as they have in virtually all the other Sun Belt apartment markets. But that is not in the cards for San Diego. Instead, our apartment developers are stymied by irrational development fees, arcane building codes and a severe shortage of land. Lest you think that the land shortage is conjectural, the San Diego Association of Governments, our government-sponsored record keeper, notes that by 2020 the total remaining undeveloped multi-family land in the county will be eight acres.

Where We’re Headed

Now, let me don my turban and opine on 2003: Ditto.

More of the delightful same for homeowners. As the presidential election is two years away, that means interest rates will be chimerically low. Note that only one president in 50 years has entered a re-election campaign with high interest rates: J. Carter.

As we go to press, 30-year mortgages are at 6 percent and 15-year mortgages at 5.5 percent. Interest-only floating loans are available for as little as 3.5 percent. If you can fog a mirror, you qualify.

With car loans at 0 percent and home loans at 6 percent, the holiday season will be 12 months. Intensive new single-family development in South County should push single-family home production above 10,000 new units (plus, of course, the obligatory 4,000 units in south Riverside County). New home prices should increase by 5 percent to 7 percent, maybe more if interest rates decline still further.

Virtually all new single-family homes will be acquired by the trade-up market. The county has more than 500,000 owner-occupied units. If 2 percent move to a new home, that quickly absorbs the 10,000 units projected.

The new home market will be fueled by the sale of more than 40,000 resales, an 8 percent annual turnover that has been steady for the past five years. Resale home prices will increase by 8 percent to 10 percent. (Don’t believe the misleading average increases of 20 percent you may have read; they are errant and misleading statistics.)

Condominium production will be ebullient Downtown with more than 1,000 units breaking ground including the super-luxurious and essentially sold-out Pinnacle Museum Tower and Intracorp’s two newest winners: Trellis Fifth Avenue and Diamond Terrace.

Elsewhere, condominium development will be slim, with just a few garden condominium projects breaking ground in South County and a handful in North County. Developers of wood-framed moderate-priced condominiums continue to be dogged by the absence of liability insurance and an inadequate supply of land.

Condominium conversions will dot the county’s countryside. In 2003, the balance of the 300-unit enormously successful River Colony will be sold out and another half dozen major North County projects will enter the market. Condominium conversions have a large role to fill: they are the last bastion of moderate-priced housing in the county and a true blessing for the first-time buyer.

On the rental scene, few projects will be built in the suburbs except at the very high end. The first rental high-rise built in 30 years in the county will enter the market in Costa Verde: Garden Communities’ 300-unit Costa Verde Towers South (to be followed by a clone to the north). Downtown will see ground breaking for another half-dozen rental projects, none of them in the “affordable” range.

“Affordable” by government definition typically means within the budgetary limits of families earning at least $40,000 annually. If you earn less than $40,000 annually, the odds of qualifying for a new market-rate apartment in this county is directly equal to the ability of developers to produce such housing: zero.

And it is getting worse. Government-sponsored financing and incentives to produce affordable rental housing is virtually impossible to arrange. In addition, the now-mandatory prevailing wages provision associated with government-related financing, drives up construction costs 10 percent to 15 percent. Combining that with the cutback in California-based financing because of the state’s financial troubles results in a massive cutback in production. It is not a pretty picture.

On balance, if you own a detached home, condominium or apartment property, 2003 will be a very pleasant experience. Not exactly a no-brainer, but it will not take a doctorate in astrophysics to make a profit. It may not even take a degree from KinderCare.

If you rent an apartment, your rent will probably increase 4 percent to 5 percent. Not too bad, except your income will most probably increase only 2 percent to 3 percent. Borrow some money from your relatives and do your damnedest to buy something, anywhere, any condition. Pounce!

If I may offer one small advisory: Don’t over-leverage. Don’t bet the farm on tomorrow. Remember 1974-1975, 1980-1983 and 1990-1994. I’m bullish as a rule, but I know that up is not forever.

Alan N. Nevin is director of economic research with MarketPoint Realty Advisors (www.marketpointra.com), a consultancy providing real estate and demographic statistics, feasibility studies and litigation support to the California land use industry and legal professions.