by Gary H. London

There is now some definition of how and when the housing market will recover. I am predicting a slight increase in pricing by the end of the year — perhaps a year-to-year 5 percent increase. This will be preceded by a gradual increase in the resale listing inventories, not yet reaching their pre-recession levels of more than 6,000 units per month — but approaching that level as the year progresses. The delivery of new homes will be slow again this year, perhaps up slightly from last year when 3,494 homes were permitted, but not much.

My sense is that the recovery is working its way through the housing sector. Indices are precariously finicky, with monthly ups and downs. Yet, it now appears that local housing prices have bottomed. There is no real possibility of a “double-dip” recession with job growth increasing.

Although the housing sector has driven past recoveries, it clearly won’t be the case this time. There is just too much distressed built- and land inventory on the market in most metropolitan areas.

The West Coast is an exception. During good and bad times it is characterized by a shortage of buildable land. But even in the West Coast market, there will not be enough short-term housing demand to be a major impetus to economic recovery.

Restrictions on the Market

The big metros in California — the Bay Area and Southern California — are all similarly impacted by one restriction or another. These often take the form of planning. San Diego County’s long-term master planning is an example. Its efforts will have the impact of drawing an urban limit line around the unincorporated areas intending for them to accommodate a minimal share, at best, of the county’s projected housing needs over the next 20 years.

Many of the incremental decisions made by cities, urged by community planning groups seeking to resist densification of existing communities, will also contribute to future housing shortages.

Much of this political action against housing has currently taken a back seat to the festering impact of the recession.

If you really want to control growth, reduce housing demand and the pressure for new development in your community, simply dial up a recession. Lucky for us, while terrible, this recession is cyclic. It, too, is ending. However, there are parts of this nation that literally are in permanent decline (think Detroit). In those areas, policymakers have to find ways to redefine those regions economically.

That is a much larger task than the one at hand here in San Diego with our diverse and growing economic base. The state’s Employment Development Department projects that we will not see job growth at the levels of the past. The region is projected to add approximately13,000 jobs per year over the next decade, a rate that is almost 30 percent below the last decade, excluding the recession. This factor alone will slow housing demand.

Growth Patterns

But there is something else evolving. Slowly, but inevitably, housing is showing a larger share of demand from natural growth. The attached chart shows (in red) how the growth of net migration is declining, while natural growth (in blue) — more births than deaths — remains steady.

Combined, it may not make any difference in terms of the quantity of demand. But it may make a profound difference in terms of the type of demand.

There is a potential disconnect between the type of housing that we are poised to supply, and the actual demand. Simply, this is rooted in the fact that the Generation Y population “cohort” — that very largest group of people born between 1979 and 1999 — will eventually require homes to start their families.

How in San Diego will young families actually be able to accommodate their housing requirements? They have five basic choices:

Families can stay in an apartment and save for a home: The baby boomer generation was able to buy their first home in their 20s. Their sons and daughters — the Gen Y’s — are likely to have to wait until their 30s to make the same purchase.

Families can buy a condo and hope to “move up” to a larger condo or single-family home. The evolution of purchase for most starter homebuyers is to purchase a condominium, step up to a larger condominium and eventually use that equity to move to a single-family home as their needs change. This model will work fine as long as the inevitable up-cycle sustains and buyers’ timing is good.

Families can try the resale single-family home market for that move up. In the San Diego region which will increasingly add mainly single-family housing on a custom or fill-in small subdivision basis, most of the available inventory will be resale homes. These homes, however, will be relatively the most expensive inventory of housing to acquire.

The Riverside Option

Families can move out of the region. In southern Riverside County, single-family homes are available and far less expensive. Of course, this entails a commute. I see this as inevitable, although dicey from a regional planning perspective.

The more drastic option is to move out of the region to a place where there are both job opportunities and less expensive housing, which would mostly be elsewhere in the Sunbelt.

Those are the choices.

So the region will grow, principally through the natural population expansion of our region, expected to account for more than 60 percent of the growth. The key decision for policymakers, community groups and each family is whether San Diego can — or even wants to — accommodate this growth. It is a very different political and economic expansion question than our region faced in the past when we grew by the huge job growth which expanded our economy.

Ultimately this gives rise to the very question, what do we want to be as we grow up in the 21st century? Do we want to become a “boutique” economy along the lines of a large Santa Barbara, where academics and high-paid or otherwise wealthy households can reside?

The answer largely lies in the way we treat the housing delivery sector. Housing sector growth is a large “multiplier” of jobs. If that sector grows that is great for the larger economy. Whether the “multiplier” will get a chance to multiply remains to be seen.