Why The Real Estate Bubble Is Not Real

County Tax Assessor Gregory Smith Talks About The Strength Of San Diego's Real Estate Market Now, Compared To The Bubble That Burst In The 1990s

Interview Conducted By Jaclyn Slagle

San Diego has been a key player in California's latest gold rush. In the past five years, plummeting interest rates have pushed real estate prices upward, transforming moderately priced homes into million dollar estates.

Now, as bargain basement interest rates inch upward, analysts say the real estate market in San Diego is a bubble on the verge of bursting. Other experts disagree.

County Tax Assessor Gregory Smith is one observer who believes San Diego's real estate market is healthy; current rent prices are sustainable; and more growth is on the way. His explanation, bolstered by more than 22 years of assessing local property values, is well-founded.

"This isn't Buffalo," Smith said. "This is San Diego. First-time home buyers, mover buyers, out-of-town buyers, everyone wants to live in San Diego."

The view from Smith's office underpins his assertion. Sailboats dot the bay, joggers run along the Embarcadero and a bride and groom exchange vows on the lawn. San Diego's intrinsic appeal is evident, but that appeal was insufficient in staving off a steep decline in real estate prices during the 1990s. What makes the current situation different?

According to Smith, it's Economics 101. Supply is limited. Demand is strong, and 5.5 to 6 percent interest rates are still historically low.

"That's why I still think today is the best of times. You have a buyer's market, and you have low interest rates," Smith said. "This is the time to buy."

"If all of a sudden, interest rates go up to 8 or 9 percent, everything I said is a moot point," he said. "But that's not going to happen. They're going to go up gradually, and I think a year from now, we'll look at interest rates in the 6 to 6.5 percent range. Historically still great, still wonderful."

When the real estate market collapsed in the 1990s, interest rates were between 8.5 and 9 percent, and San Diego was feeling the drastic effects of the savings and loan crisis. A decrease in military population due to massive deployments to the Gulf War and a loss of jobs from the departures of General Dynamics and Convair exacerbated the financial situation. These factors left developers who had speculativley built hundreds of houses at once to cut costs with large amounts of unsold inventory.

This time, San Diego is better prepared. The area has a steady flow of newcomers; jobs are being created, not cut; the local economy is more diversified; and developers are pre-selling units, then building tracts in small phases to prevent a bubble of unsold inventory.

"For years, we had tremendous population increases, but we neve produced enough housing for our population," Smith said. "So now we're in a position where too many people are chasing too few homes."

"People want to buy a home," he said. "And that's the first step, and the best investment you can make."