After several hot sales years, the San Diego housing market will cool, but prices will remain steady. (photo/alandeckerphoto.com)

San Diego County, like all counties, is subject to the vagaries of the national economy. Fortunately, 2007 will be a fairly placid year for the United States. We anticipate that job gains will be wholesome, unemployment will remain low, inflation will be negligible, long-term interest rates will remain about where they are now, the federal funds rate (the Bernanke factor) will decline modestly and the housing market will be flat if the present administration doesn’t do anything to mess up the current state of the economy (talk about wild cards).

A special word about the housing market: Nationally, 1.6 million to 1.7 million new housing units permitted is considered a very good year. In both 2004 and 2005, there were more than 2 million. The last time the United States permitted more than 2 million homes was in 1972. We are projecting this year the nation’s builders will produce 1.8 million to 1.9 million housing units, 75 percent of them single-family units. Not so bad.

The national home resale market will be flat in 2007, once again coming off several years that only can be categorized as extraordinary and, as such, not to be easily repeated. Resale activity around the country topped off in 2005 with 7.08 million units resold and in 2006 tailed back to 6.2 million. In 2007, resales will barely reach 6 million.

Pricing in both the new and resale markets will be flat, at best. In some markets, net declines on the order of 5 percent to 10 percent from 2005 highs are possible, but those markets will be few. In most markets, home prices will remain steady, but homes will take longer to sell and require a negotiating environment. The art of salesmanship will be duly important.

California Economic Forecast

California has been leading the nation in most respects during the past few years, largely due to the exceptional spirit of its housing market. With that housing market now in a normative condition, the economy will settle into a new mode, one that is categorized by steady growth, but not ebullience.

It is likely in 2007 the state will gain 180,000-210,000 total jobs, about half that of 2005 and the same as in 2006. As in 2006, virtually none of the gains will be in construction or manufacturing. All will be in the services industries, a category that includes business and professional services, government, education, health care and leisure and hospitality.

The California unemployment rate slipped to its lowest rate in recent memory. The rate at the end of 2006 was 4.5 percent. This slippage was due to a combination of new jobs and a very small increase in the work force. Last year, for the first time, California topped 17 million civilian jobs. Each represents a contribution to the economy and is part of the demand for housing.

In 2007, California’s economy should be growing faster than the nation’s, but the softness of the housing market will cause it to lag. In California, the housing industry is an unusually large factor in the economy, primarily due to the high price of housing. Simply put, the high price of our homes has an especially significant economic impact on labor and material output. Thus, a new home selling for $800,000 in California is the equivalent of building four homes at $200,000 in Iowa. Further, because our homes tend to be more complicated/sophisticated than in most states, each has a heavier labor component.

Statewide Construction

Last year, we said, “It’s time for a breather.” We’re saying it again. The first quarter should be unusually slow as developers further reduce their inventories. Once those inventories are back to normalcy, the need for concessions will decline. We anticipate in the first quarter of 2007 most home builders will hesitate to start more than a few homes at a time, nor should they.

A new mentality is necessary for California home builders. Actually, it’s an old mentality, going back all the way to 2001 and 2002 before the craziness hit. In the late 1990s, total units permitted averaged 107,000 units. Then in 2000-02, they crept upward to 150,000 units and then in 2003-05, upward to 200,000. That type of massive increase bent the industry out of shape. It caused lot and land prices to wildly accelerate, material and labor cost to skyrocket and subcontactors to throw away their standard profit measurement tools.

Now in 2007, we’re heading back to some form of normalcy. Instead of permitting 140,000 to 150,000 single-family units, California will permit 110,000 to 120,000.

On the multi-family side, the state will continue to produce 45,000 to 55,000 units, a combination of rental housing and condominiums. In the condominium market, most multi-family production will continue to be the low-density townhome/triplex units that have become a substitute for single-family housing in suburbia.

Many of the high-rise complexes touted for development in the urban cores will be put on mothballs until lenders and developers regain confidence in the market.

Construction costs appear to be at a standstill — at least as far as wood-frame construction goes. It is our contention that type-5 construction costs will decline by 5 to 10 percent this year as subcontractors return to reality and competition becomes the norm once more.

On the steel and concrete front, the U.S home building industry is only half of the construction industry in the nation and, of course, far less than that in the rest of the world. As most of the non-home building market is steel- and concrete-oriented, we do not anticipate costs in that sector will decline. The massive projects in Dubai and Shanghai directly compete with the United States.

In addition to reductions in home building costs, expect a reduction in land prices in most metropolitan areas. In the past three years, the inventory held by the public home builders has increased from a four-year to an eight-year supply. Some of those lands will have to be remarketed. Toward that end, smaller builders will have accelerated opportunities to obtain lands at prices that are almost palatable, both in the suburban and urban areas.

As the equity markets remain liquid and interested in home building, it should be a good year for those with projects that make economic sense.

San Diego County

The San Diego economy will continue to expand in 2007, although not as fast as in 2005. In 2005, the county added more than 25,000 jobs. In 2006, it added more than 15,000 jobs. In 2007, we anticipate the job gains will be on the order of 13,000-15,000, with unemployment rates in the 4 percent range.

It would be difficult to repeat 2006, given the slowdown in construction. All other sectors of the economy will move forward, perpetuating the overall strength of the economy. The basic drivers of the economy — military, manufacturing, tourism, high-tech, bio-tech and import/export activities — all appear healthy. Of those mentioned here, only manufacturing is not experiencing growth, but it is level.

The real estate construction industry is in a slowdown mode. San Diego County is one of two areas in California (the other is Sacramento) that has seen a severe reduction in permit activity, both in multi-family and single-family.

In this century, 2003 represented the peak year of activity, topping out at 18,300 units. Since 2003, the permit count has steadily declined.

In 2006, fewer than 5,000 single-family units were permitted along with slightly more than 6,000 multi-family units. In 2007, we see the single-family production matching that of 2006, but the multi-family side declining to as few as 5,000 units. The decline in multi-family units permitted relates to a dearth of rental product under construction and a fallback in Downtown vertical construction. The last time the county has fallen below the 11,000-unit count was in the mid-1990s and that was an entirely different set of economic conditions.

In the resale market last year, some 29,000 single-family homes and condominiums were sold in the county, 23 percent fewer than in 2005. About a third of the sales were condos. The average price of $605,000 was off 5 percent, which isn’t bad considering the New York press was forecasting declines of about 40 percent.

The local popular press has been particularly negative on the real estate market and that negativism is now having an effect on buyer attitudes. Our research indicates that more than 95 percent of the real estate articles written in the past year in the newspaper of record in the county were negative.

In 2007, we sense San Diego’s housing market will stabilize and the large number of buyers who have been sitting on the fence waiting for Armageddon to occur will finally realize it isn’t going to occur and they still need houses.

And Downtown, well, Downtown will just keep growing. Unfortunately, due to the severe cutback in vertical construction, the inventory of new product will be stunted in 2007-09. Holes in the ground are becoming a rarity. The resale market just keeps plugging along.

On balance, the local economy is healthy and growing. We can just chalk up 2004 and 2005 as aberrations, not soon to be repeated. We are entering a period of normalcy, and that’s not such a bad thing.

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.