A Guide To Understanding The San Diego Housing Market Bubble

Reviewed by: Brandon Brown

In the past two decades, the rise and fall of the San Diego housing market may not have instilled trust in the steadiness of real estate prices. And with a majority of housing markets experiencing a major boom post-pandemic, it’s no wonder that San Diego County homeowners looking to make a change might be feeling uneasy as we head into 2022. 

San Diego County is a particularly hot real estate market as of late. The median house price in San Diego rose 26.2% between August 2020 and August 2021. ¹But if you want to cash in on your equity, it’s important to understand the forecast for the San Diego real estate market.

So, are we in a San Diego real estate bubble? The answer is most likely no—at least not one like the 2008 housing market crash. Keep reading to discover how you can navigate the landscape as a seller and make the most of your investment in Southern California, all while considering the latest San Diego real estate trends.

Is the San Diego Housing Market Bubble Going to Crash?

Historically, San Diego’s housing market has been on a steady rise with increasing demand, second to only Phoenix, AZ, in terms of overall growth. Trends show more individuals moving out of the larger Californian cities and moving towards places like San Diego, which boasts an appealing job market, community, and climate for a homeowner 

As a result, homes are going fast in this Southern California city, as is evidenced by a real estate metric called weeks supply. In short, this is a measure of how many weeks it would take for all the homes on the market to sell given current market conditions.²

• Traditional markets tend to have somewhere around 6 weeks supply.

• The San Diego market had only 4.8 weeks of supply as of late 2021.

• There has been an 18.3% drop in listings, leading to a further low inventory of homes despite growing demand.

The housing prices tend to rise as long as there is a disparity between home supply and demand. With this rise, you’ll see the markets tick upwards in a familiar pattern to other market crashes.

However, unlike previous years, this real estate market is stable and equipped with qualified buyers.

As long as supply does not meet the demand of buyers, the high prices will most likely continue to rise. With inventory returning to pre-pandemic levels, increasing last August by 0.4%, you can expect the seller’s market to start to cool if anything.³

How to Understand and Identify Market Bubbles

What signs might indicate a San Diego housing bubble is really on the horizon? A housing bubble occurs when the price of assets (in this instance homes) rises beyond the fundamental value—what the asset is actually worth. 

Factors that determine the fundamental value of a house can include:⁴ 

• Proximity to a strong job market
• The climate or region
• The school district the home is located within
• Characteristics of the home such as architecture, yard, or size
• The supply and demand of single family homes within the area

The last factor is an important contributing factor to San Diego’s rising housing prices. As we’ve mentioned, there is a large deficit of supply from the pandemic, and San Diego is no exception. When a potential San Diego home buyer is looking to move into any given area, and there aren’t enough single family homes to accommodate his or her home move, then the fundamental house prices will begin to rise.

Leading economists believe the danger in bubbles is often due to the home price diverging from its fundamental value. The overconfidence of buyers and sellers is like a snowball effect. The homes are overvalued beyond their fundamentals, leading to buyers accepting mortgage rates that will eventually surpass the value of the home.⁴ 

When this happened in the past, there was a string of foreclosures that led to the prices of homes falling below the fundamental values—and that’s when the bubble burst. 

What is the San Diego Housing Market Forecast for Sellers?

Looking for the best time to sell a house in San Diego?While you’re probably not going to see another bubble burst like previous boom and bust cycles, forecasts for the San Diego Housing Market show that the market will likely rise then cool sometime within the next 1-2 years, bottoming out before bouncing back from an influx of new buyers. 

• The number of sales in San Diego fell by 3.9% in September 2021, reaching a total of 4,148 transactions.⁵

• While this is indicative of the spring and summer buying season coming to an end, the fall in sales also follows a cooling of the market.

• You can still expect home prices in San Diego to rise into 2022, but the rise in values is expected to fall by 5% to a predicted 11.8% increase over the year.⁶

The increase in home values and rise in interest rates—which bottomed out this past year and are now on the rise—have led buyers to start to slow their purchasing in the area. The market will continue to stay competitive, but many buyers will hold off purchasing until prices or mortgages drop.⁵

Impact of 2020 Recession and Supply Forecasts in San Diego

As we’ve mentioned, supply and demand is the main factor for San Diego’s high house values. The 2020 recession and work-from-home climates drove new individuals from the Silicon Valley job market to San Diego. And with more work-from-home opportunities, the appeal of San Diego living is still on the rise.

At the same time, a majority of contractors paused work in 2019 and 2020. As a result, contractors will not catch up to the inventory demand for the city for the next several years, having already fallen behind the desired construction rates.² 

While the amount of single-family residential (SFR) construction is already rising, with a 23% increase in 2020, the next peak in SFR construction will be 2023. Until then, low supply will cause the price values to continue driving prices to increase.⁷

Foreclosure Forecasts in San Diego

Another important factor you should consider when selling your home is the foreclosure rate within the area. Since the pandemic and subsequent recession, there was a significant drop in employment. With the expiration of government aid, including forbearance programs and foreclosure moratoriums, the rate of foreclosures will continue to rise. 

Foreclosures drive down the value of homes within the market. As more foreclosed homes flood the market, San Diego homeowners will see their property values tugged by the downward pressure. In quarter 3 of 2021, California led with 3,434 foreclosures, with San Diego a contributing factor to the state’s numbers.²

However, you shouldn’t worry just yet. San Diego leads the state in job recovery, surpassing 1.4 jobs and the number of jobs before the 2008 recession. This, paired with San Diego’s ability to steady the decline in turnover rates compared to the rest of the region, means the city’s sellers will continue to benefit from steadily increasing prices.⁷

Take Advantage of a Strong Sellers and Renovators Market

Buyers will continue to get more conservative with their offers in the coming year—with sales of homes falling from 3%-7% over the asking price to equal or below 2% of the asking price.

This means that it could potentially get harder and harder to sell off your property at the price you want.⁵

If you’re looking to make a move, downsize, or cash in on your equity, now could be the time to act. Just keep in mind the following factors that could delay your sale:

• Necessary renovations and repairs – Does your home need a little TLC before it goes on the market? Cosmetic issues could result in lower offers, while serious repairs could lead prospective buyers to back out of a deal altogether. If you’re unable to finance repairs, you can always look for a buyer who’s willing to purchase the home “as-is.”

• Typical real estate closing time – Unless you’re selling to a cash buyer who will buy the home as-is, there will be several obstacles to clear before closing. These include inspection, contract negotiations, the buyer’s loan approval, and the final walk-through. Should your sale fall through at any of these stages, you might need to re-list it under less favorable market conditions. 

• Slower-moving market – Staging and preparing your home for the real estate market can be a time-consuming process. If you’re dragging your heels, remember that rising interest rates and lack of inventory may discourage some buyers from jumping in. Just because your neighbor sold their home within a matter of days in 2020 doesn’t mean you’ll have the same experience. 

Simplify Your San Diego Sale With FlipSplit

While there is no true San Diego housing market bubble, there’s no time like the present to cash in on the valuable equity you’ve built in your home.

And if your home needs renovation and repairs, you still have options.

At FlipSplit, we buy houses and provide a way for homeowners to sell their homes as they are—no repairs or modifications needed. We buy your home at the highest price available, renovate, and resell, sharing the profits with you.  

If you’re looking to avoid the up and downs of the market, or don’t want to deal with the hair-pulling hassles of buyers, agents, and the mess of offers, try our free home assessment to evaluate your property. We’ll provide you with an offer and can adapt to your moving schedule—as soon as months, weeks, or even days.

Sources: 

1. CNBC. Home prices in August hinted at possible cooling in the market, S&P Case-Shiller says. https://www.cnbc.com/2021/10/26/august-home-prices-hinted-at-possible-cooling-sp-case-shiller.html 
2. Fortune Builders. San Diego Real Estate Market: Prices, Trends And Forecasts 2021. https://www.fortunebuilders.com/san-diego-real-estate-market-trends/ 
3. Zillow. Housing Market Continues to Creep Toward More Balance (September 2021 Market Report). https://www.zillow.com/research/september-2021-market-report-30226/ 
4. npr. Home Prices Are Now Higher Than The Peak Of The 2000s Housing Bubble. What Gives?. https://www.npr.org/sections/money/2021/08/17/1028083046/home-prices-are-now-higher-than-the-peak-of-the-2000s-housing-bubble-what-gives 
5. Daily News. Southern California home prices hit record high despite slowing sales. https://www.dailynews.com/2021/10/20/southern-california-home-prices-hit-record-high-despite-slowing-sales/ 
6. Times of San Diego. Housing Market Expected to Stay Hot Through Early 2022 As Local Home Values Rise 16.5%. https://timesofsandiego.com/business/2021/05/21/housing-market-expected-to-stay-hot-through-early-2022-as-local-home-values-rise-16-5/ 
7. firsttuesday Journal. San Diego housing indicators. https://journal.firsttuesday.us/san-diego-housing-indicators-2/29246/ 
8. San Diego Business Journal. Housing Frenzy Cooling Down. https://www.sdbj.com/news/2021/oct/05/housing-frenzy-cooling-down/ 
9. Insider. Wait until 2022 to buy a house, economists say. https://www.businessinsider.com/housing-prices-go-down-even-out-real-estate-2021-7