Photo/Sandé Lollis Architectural Photography

This is not the easiest year in San Diego history to forecast. The major problem lies in the myriad of conflicting statistics and indexes at the international, national, state and local levels. After reviewing pages of data and literally dozens of forecasts by learned academics and scholars, I am going out on a limb and taking a very contrarian view of 2008. Most of the forecasts I have reviewed anticipate no start of an economic recovery until late 2008 or early 2009, especially in California. My crystal ball, though cloudy and slightly cracked, has a slightly more optimistic scenario.

To get our bearings, let’s first review where we are on the national economic scene.

• Due to the weak U.S. dollar, our goods are amazing bargains and the world is taking advantage. A massive boom in exporting is on, particularly to Third World countries desperately trying to become Second World countries. They need our goods to do so because they don’t have the resources to create them themselves. As a result of expanding exports, the gross domestic product continues to expand at a rate that is within the range of normalcy.
  
  
• Military spending continues at a very high pace — a boon for San Diego. Although virtually all of us would rather not have forces in Iraq and Afghanistan and other godforsaken places, we are in these places and spending enormous sums of money. That money creates thousands of jobs in industries that produce goods for the military and they are virtually all U.S.-based jobs.
  
  
• It now is proven that gas at $3-plus a gallon has only a negligible effect on economic growth.
  
  
• This is an election year, which means the party in office at the White House will do as much as possible to generate economic strength in order to retain the presidency and increase congressional seats. The most important thing that the D.C. crowd can do is to reduce interest rates.
  
  
• Today, interest rates are going down. Interest rates generally follow the path of inflation and inflation is declining as well. The 10-year T-bill provides the basis for the 30-year fixed-rate conforming loan (loans under $417,000).  As of late December, the 10-year T-bill is about 4 percent. Home loans are in the 6 percent range, stable and edging downward.

Yes, troubles are plentiful in the sub-prime market and lenders are tightening their FICO scores. But the woes created by the recent situation have been exaggerated and the government is taking all steps necessary to ameliorate the situation.

Americans also tend to be remarkably responsive and self-correcting. They now know that FICO scores are a life or death issue in home acquisition and will take whatever steps necessary to drive up their number to obtain home loans. It will not happen overnight, but it will happen in the next few months. A home buyer’s credit score appears to be more important than a criminal record. Today, it seems like every homeowner or potential homeowner knows their FICO scores just like students all know their SAT scores. Individual scores are now a subject of dinner party chat.

The California Economy and Housing Market

In 2008, it is likely California’s home building industry output will be near 115,000, 60 percent of the past five years’ average. Single-family permits will total 71,000 units and multifamily 45,000.

The massive decline in residential construction was a function of "irrational exuberance" by the market  in 2003-2005, the rapid run-up in land prices due to the shortage of readily buildable lots; the decline in interest rates; ready availability of loans to owners and investors; and a generally strong economy. The expansion of the construction industry (and its multitude of related industries) provided much of the economic vitality in the state.

We foresee a modest turnaround in the California housing market in 2008. In the single-family market, we anticipate a modest improvement in sales in those markets that are highly urban like San Diego, Orange County and the Bay Area.

In those areas, where lots are not abundant, we forecast an increase of 10 percent-15 percent in sales in 2008, with prices holding steady. Unsold inventory will remain exceptionally low, by design, and homes will be offered most often on a non-contingent basis. In other words, homebuilders in those areas will be building almost on a custom basis. That most certainly is not the M.O. of the major public builders, but if they want to remain in the state, they will adapt.

As a result of massive shifts in home pricing in these areas, and the reduced interest rates, home sales will increase substantially by the third quarter. Total new home sales will accelerate in the second half of the year, leading to a 2008 single-family total of more than 80,000 units.

In 2008, multi-family units will total 46,700, slightly higher than in 2007, primarily as a result of extensive apartment construction.

San Diego’s Housing Market

The "New Reality" is the byword for 2008 and housing enters a new era in San Diego County. This started in 2005, but we now are seeing the process in full bloom.

It starts with San Diego County as a maturing economy, one not producing jobs at a pace that mirrors history. In earlier decades, we saw decennial job gains averaging 25,000 to 35,000. In the new San Diego, the averages will be in the 12,000 to 18,000 range, even when construction picks up.

New Single-Family Housing

From 1999 through 2004, single-family production averaged almost 10,000 units. Since late 2004, it has edged downward as the county’s lot supply dwindles. In 2007, total production was shy of 4,000 units. In other words, during the torrid market of 2004-2005, production of single-family homes decreased substantially. That, of course, added to the heat of the market.

The demise of the single-family lot is something that has been in the works for some time as local government bodies have gradually boosted regulation and shut down the supply of land. That is not going to change. Therefore, the remaining subdivision lots will be cherished by their owners and the price will not decline. The prospect of producing lower priced single-family homes in this county are minimal.

This paucity of new lots has resulted in many, if not most of the national public builders abandoning San Diego County, leaving skeleton staffs to clean up remaining inventory. During the "hot years" the national public builders were responsible for more than two-thirds of local production.

In 2008, single-family permits will increase to the 4,000 to 5,000 range, largely because of the replacement of the 1,000-plus homes destroyed in recent fires.

New Multifamily Housing

Multifamily housing production has been declining since 2003 when 8,859 units were permitted (exclusive of condominium conversions). In 2007, multi-family unit production fell below the 4,000 level as vertical construction subsided. In 2008, more than 4,000 multifamily units will be constructed, largely the result of apartment developers acquiring sites once destined for condos.

Four products comprise most of the San Diego multifamily "for sale" market: Mid/high-rise construction, wood frame vertical construction (usually four levels over two levels of parking); townhomes/plexes and rental product.

In 2008, mid/high-rise condominium construction will be negligible. While several projects were recently completed and three are under construction, a scant few are in the early stages of development. The next round of mid/high-rise development will deliver product in 2010-2011.

Townhomes now represent surrogates for the detached home in this pricey county. A few of these projects will be started in 2008, but not enough to constitute a full blossom.

Wood frame vertical condominium construction has almost come to a halt. The costs of construction (although lower now than in the past three years), combined with the expense of subterranean parking, drive pricing up above what the market will accept. A substantial number of sites for this product type were acquired in the halcyon years of 2003-2005 at bloated prices by condominium builders, but the numbers make no sense in today’s more realistic market.

Many of these low-rise sites are being sold to apartment developers for luxury rental apartments as the rental market is strong and the national apartment builders are flush with cash and can tolerate entry cap rates of 3 percent to 4 percent. Recent sales to Avalon Bay, Archstone, OliverMcMillan and Hanover are good examples of this trend.

As in the single-family sector, most of the national public builders have closed up shop here and many have already sold their land. They find it impossible to generate sufficient volume to warrant regional offices in San Diego County. Most now consider our county a satellite of their Orange County or Los Angeles offices. Occasionally, they may build a project or two here, but cannot be depended on for the levels of production needed to satisfy local apartment demand.

The Resale Market

The resale market mirrors the new home market. Listings are at the 21,000 level, but gradually going down. Sales of detached units are down from 20,000 in 2006 to barely 15,000 in 2007. Condominium sales are down far less, totaling 8,500 in 2007 compared to 10,000 in 2005.

By and large, it has not been a brilliant time for resales, but there are exceptions. The upper end of the market in selected communities has maintained price levels, although sales have slowed.

In 2008, we see a gentle pickup of sales of both detached and attached housing as prices are nearing the bottom-out point and interest rates are attractive. Full-time active agents tell me buyers are out there and rates of inquiry are up substantially. Time will tell.

Poor Renters/Happy Landlords

The apartment market remains strong in San Diego County with vacancy rates in the 4 percent to 5 percent range and annual rents rising at 3 percent to 4 percent. San Diego County is blessed with one of the nation’s more stable apartment markets, due to the combination of high-priced for-sale housing and a paucity of new apartment construction.

Several new projects will break ground or be completed this year, but all are Class "A" developments with monthly rents pushing $2 per square foot. The largest, the 1,500 unit Crossroads in UTC by Garden Communities, is nearly complete. Archstone, Fenton, Avalon Bay and Fairfield, among others, will break ground on new suburban product. OliverMcMillan is moving forward with at least two new projects Downtown. Hanover is under construction with 180-units at Ninth Avenue and Market Street and others are anticipated. Downtown is becoming well supplied with rental product.

In 2008, we see more of the same. Strong market. Dependable rents. Virtually no new moderate priced rentals.

The Overall Housing Picture

The big picture for 2008 portends modest improvement in all sectors, but a continuing shortage of new moderate priced housing of all types. Even lower interest rates won’t justify the development of higher density moderate priced housing.

If interest rates continue to decline, there is a good chance that resale activity will increase 10 percent to 20 percent in 2008, although that will not cause wild cheering sessions at Realtor meetings. Prices will stabilize in 2008, but an upswing is not in the cards. Sorry.

Overall, 2008 will be a year of slow recovery in the real estate market, but the important thing is that it will gradually recover. This malaise in the housing market is getting boring for both prospective home buyers and real estate agents.

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.