I often hear people say condo prices in San Diego have to come down.  I always ask the people saying this, why do you think that is?  I don't really get many reasons other than its time, the real estate market cycles and a lot of people can't afford them. 

Im old enough to have lived through a few real estate cycles and realize affordability is an issue.  But real estate cycles happen because of an outside force (usually from the US Govt) and affordability has been an issue since I moved to San Diego in 1990 and people thought I was crazy to spend $200,000 on a condo that is now worth $600,000.  So I discount the argument on lack of affordability.  Its been proven to not be a driver of price trends.

Outside forces, now thats one thing the market of buyers and sellers cant control but can be influenced by. Let's look at the last down cycle, there were two factors in play at the same time that created a bubble in that eventually burst.  The first of those factors was the Government mandated that banks dramatically ease their qualification to get a mortgage.  We all remember how little documentation was needed to get a loan back then and many programs required no down payment and some programs even let you qualify on a teaser rate of 2% which was reset to 5 or 6% a couple years later. 

The second factor was an increasing supply of new condos being built. In a span of 9 years (2001-2010) downtown San Diego added 8,270 condos to an existing market that had only about 2,000.  Looking back we know that there were not 8,000 individual buyers ready to absorb that new inventory.  There was no off setting market force like say a new Amazon headquarters locating to downtown, so where were all these buyers going to come from?  Because there were not enough buyers to absorb all these units at market prices the market had to adjust itself in the form of lower prices to get all these units sold.  As you can see on the graph prices went down about 40% from their peak in 2005 to the bottom in 2011. 

Once it was clear prices were dropping, builders stopped starting construction on any new condo buildings and most just finished what they had under construction and left town.  You can see this on the chart in the green bars where new construction stopped in about 2007 and the last of the new buildings was completed in 2009. 

For all of us that have taken Economics 101 in college its no surprise that once new construction stopped coming on the market (increased supply) that price started to climb in 2012 and have been increasing every year since. 

So if the prices are going to come down, its not because the clock says so many years have passed its time, something has to happen to disrupt the supply vs demand market force.  We all know its currently pretty hard to get a loan, no lender I know thinks were going to get back to 100% financing and stated income loans, etc.  As you can see from the chart, there is no big uptick in new construction.  There is a brand new building that is finishing up this year and one on schedule to be completed next year, together these will add only about 500 residences to downtown.