Matching 2004 numbers, the region’s builders will pull permits this year for about 16,000 new homes, between 8,000 and 9,000 of them detached models like McMillin Homes' Mill Creek at StoneBridge Estates project pictured here.

Wearing my guru turban (made in China), I am able to see at least 30 days into the future. But as an economist, I feel obligated to prognosticates for the entirety of 2005.

The national forecast is perhaps the most daunting task because of the “big picture” factors that come into play, most of them negative. The best known are the outrageous national debt, the free-spending philosophy of Congress, the moribund stock market, the costs and political turmoil relating to Iraq and Afghanistan, rising oil prices (over which we have no control), the relatively slow economy, the Social Security/Medicare woes, the paucity of new job creation and the weakness of the dollar. Then there is the ultimate wild card: the inevitable next Al Qaeda attack.

The positive side of the equation is limited to three economic items: strong corporate profits, rising productivity and an ebullient construction industry with strong residential resales.

My beat, the construction industry, lives or dies based on long-term interest rates basically determined by the world market. With China, Europe and Japan holding most of our long-term paper, we are at the mercy of their investment strategies.

Despite the litany of negatives weighing on us as a nation, some degree of optimism for 2005 is in order. New job creation in 2005 could top 2 million. These positions will be the result of gradual expansion of consumer expenditures, business investment and strengthened exports.

The weakness of the dollar will cause pain for those who rely on imported goods. Conversely, we should substantially increase exports. As President Bush recently pointed out, “more and more of our exports are going overseas.”

The United States’ three biggest imports are cars, electronics and oil. Economic theory says that when the prices of imports increase, we will buy more of the goods manufactured at home because of their price advantage. If that theory holds true and we also have an export acceleration, we should add jobs. In addition, corporations, having wrung all they can from productivity, will be forced to add bodies to their payrolls in 2005 as business increases.

The oil problem appears to be easing and Americans are just accepting the inevitable, although I fail to see a surge of economy car purchases. Unfortunately, the sale of 50,000 Toyota Priuses has little impact on a nation with 150 million vehicles. Until hybrid cars stop looking like wind-up toys, Americans will continue to buy gas hogs.

Construction will remain the driver of the economy as long as interest rates remain tolerable. The key is construction’s multiplier factor: the roll of invested dollars through the economy. Virtually all basic industries in America have a multiplier effect of 1-1.25. The construction industry multiplier is more than 2. The economic power of the construction industry relates to its three basic inherent strengths: it is local (most of the dollars that go into a new house go to local labor and non-imported materials); it is usually highly leveraged (typically 70 percent to 80 percent) so you get more “bang for your buck”; and the impact of the investment is immediate.

The economists in Washington, D.C., know full well that the construction industry has been carrying the nation for the past five years and they will do everything possible to ensure that the industry prospers in 2005.

The Homeland (aka La La Land) Outlook

It is hard to believe that the economy of La La Land (San Diego County) will improve, but it will. In 2004, we saw a major job recovery with an increase of more than 20,000 wage and salary positions, nearly triple the 7,000 added in 2003. It is highly likely the job count will increase by 20,000 in 2005, maybe even 25,000. The gains will be across the board. Even manufacturing will see increases for the first time in many years. Tourism, biotech and exports will lead the way in the basic employment generation category.

Last year was another good one for homebuilding, although not quite as good as the prior year. In 2003, San Diego County’s government agencies approved permits for 18,300 housing units — 9,500 single-family and 8,800 multi-family. In 2004, the number fell to about 16,000 units, with 9,000 to 10,000 being single-family homes and more than 6,000 multi-family units. The decline in 2004 is due entirely to the multi-family side as rental construction subsided.

In 2005, new housing permits will match 2004 with between 8,000 and 9,000 allocated for single-family homes and 6,000 to 7,000 for multi-family units. Virtually all the multi-family units will be condominiums. The condominium production could be somewhat higher if all the projects announced for development in Downtown San Diego move forward as planned. And they may.

The total for 2004 excludes the 3,000 to 3,500 apartment units that were converted to condominiums that year and another 3,000 or so units slated for conversion this year. The combination of condominium construction and conversions will drive up home ownership to the 65 percent level, the highest in San Diego history. (Ten years ago it was 54 percent). That’s not quite up to the Midwest’s 75 percent, but it is getting closer.

The action in 2005 will continue to be dominated by South County with the usual 2,500 units in Chula Vista and another 1,000-plus in Otay Mesa. For the first time in decades, National City will chime in with new housing. The rest will be in bits and pieces as builders beg for approvals.

Both new and resale home prices should increase 5 percent to 6 percent in 2005, distinctly below the gains achieved in the past few years. The 15 percent increase projected by some in the real estate industry is folly. Condos will increase in value slightly more than single-family homes because they are rising from a lower base.

People still need homes but the bloom is off the rose as far as Vegas-type bidding is concerned. The demand for housing is still there and will be there as long as interest rates continue to be reined in. As we write this, long- term rates are on the way down again. People will stretch to buy as much as they can, but they now know that what they are buying is a home, not a penny stock. Instant profits are not in the cards for 2005.

As usual, our home building industry cannot meet demand for housing; hence the continued purchasing of 4,000 new homes and thousands of resale homes each year in south Riverside County by people who work in our county. Love that Interstate 15.

The new act in town or out of town is Imperial County. Nice two-hour ride. McMillin and a host of others are buying up El Centro, betting on the desperation of the San Diego housing market. With an average price of $700,000 for a new home in San Diego and $400,000 in south Riverside, Imperial Valley’s $200,000 looks good. A little light on beaches, Nordstrom’s and culture, but you can’t have it all.

Those whose fortunes are tied to the Downtown San Diego market will be pleased to know that after the 2005 inventory is occupied, there will be no new product to move into (that isn’t already sold) until at least the third quarter of 2006. There will be a couple of nice conversions in 2005, but they will sell out by year-end. The big problem is that it generally takes four years from the time a site is put into escrow until the building is completed. That makes research into the future fairly easy in terms of supply. Drive around Downtown and see how few new buildings are in the early stages of construction. Those you do see are substantially sold out.

Don’t look to the suburbs for high-rises. Very few places in the county can support high-rise construction, especially with costs at $300 a square foot. Critical mass is particularly important to high-rise construction and very few developers and lenders are willing to take the chance. Even in Downtown San Diego the number of high-rise developers could easily fit into Market Pointe’s conference room. Most only have the capability of doing one project at a time.

On the apartment scene, a grand total of 2.5 percent of our apartment supply was converted into condominiums and sold in the past five years. Not exactly an earthshaking share of the market. As in 2004, most of the conversions in 2005 will be more modern high-quality rental apartments. They will be mostly replaced by the 2,000-plus high-end apartments recently built or now under construction. Unfortunately, it is virtually impossible in San Diego to build unsubsidized moderate-rent apartments due to anti-apartment zoning and obnoxious government development fees.

The latest survey of major apartment property managers here shows a vacancy rate of 5 percent with another 3 percent on notice to vacate. So no crisis there. Expect the same for 2005. Rents will rise modestly in 2005, most probably 4 percent to 5 percent, directly in line with operating expense increases.

Fortunately, the clown and juggling acts at San Diego City Hall have little to do with the success of the local economy, at least in the short term. The smart money knows that San Diego is the place to be for the long haul. And, no, the bubble will not burst in 2005. Trust me. Trust my turban.

Alan N. Nevin is director of economic research with MarketPointe Realty Advisors (marketpointe.com), a consultancy providing real estate and demographic statistics, feasibility studies and litigation support to the California land use industry and legal professions. Nevin can be reached by e-mail at anevin@sandiegometro.com.