SAN DIEGO—Speakers at Burnham-Moores'15th-annual residential eal estate conference Thursday said aconfluence of factors is preventing median-priced homes from beingbuilt here and creating a supply-and-demand situation that isdriving up prices to unsustainable levels. The panel, in additionto keynote speaker Norm Miller, Ernest W. Hahn Chair ofreal estate finance at Burnham-Moores Center for RealEstate at the University of San Diego,said San Diego is in a crisis mode as far as having enoughhousing units available to meet our needs now andin the future; homes are not affordable to the middle class; thereare not enough for-sale single-family homes in ourinventory; and all of this may negatively impact San Diego'seconomy.

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Miller said the housing sector is doing great thanks to lowunemployment, and he doesn't expect anotherrecession to hit until 2019. He cited stats fromCoreLogic that forecasted interest rates rising 1%in the short term and .5% in the long term and housing prices torise 4% to 5% during 2016. Household formations was up in 2015 by1.7 million units, but the average age to buy has risen to 31, duein part to large amounts of college debt stemming affordability. Asmuch as 20% of income is used to pay the student debt of 40% ofyoung borrowers, and the homeownership rate isunder 64%, heading down to 62% before bottoming out, he said. Theforecast for San Diego is a 7% increase in home prices for2016.

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A national lack of housing supply since 2012 has been helping todrive up prices, with next to no inventory under $600,000. Manyhomeowners still have negative equity and creditissues leftover from the recession, said Miller. The worstforeclosure states are Nevada, Arizona andFlorida, with California a little under the national average.Still, foreclosures are coming down, REOs are inthe normal range and underwriting remainscautious. However, NIMBY-ism is a big factor deterringdevelopment.

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In San Diego, newer homes are smaller and cheaper than they were10 years ago, and we're not building much single-family ormultifamily housing, which is also keeping supplydown. Prop 13, while it has its merits for currentowners, may cause owners not to put their homes up for sale becausethe longer one owns a home, the lower the property tax will be,encouraging owners to hold. This would have a dampening effect oninventory as well.

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On the rental side, 35% of the rental stock in the US issingle-family homes, and single-family vacancy is the lowest in theUS among all property types. Single-family rent growth isespecially strong in the west at 7% to 8%, said Miller. "Lowvacancy is expected for a long time, and rental rates are expectedto rise."

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Miller also cited stats from CBRE showing thatSan Diego has among the lowest cap rates on single-family detachedhomes in the US, and deliveries are expected to increasedramatically in 2017 and 2018.

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He also referenced the London Group, saying,"We have a housing shortage of 50,000 to 118,000 units." Most ofwhat gets approved for development is upper-income housing, withvery little lower-priced housing in the planning stages.

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Next came the panel titled, "Housing Affordability andIts Impact on the Economy," which was eye-opening.Moderator Stephen Doyle, president ofSandy Point Properties, said that San Diego island constrained, and supply in San Diego can't go farther eastthan where the San Diego County Water Authorityservices, further restricting growth in the county. DeborahRuane, SVP of San Diego HousingCommission, said her organization is trying to convertmarket-rate housing to affordable housing but has had to asklenders for more money because construction costshave risen so dramatically. "The government is the driver forhousing-cost increases," she said.

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In response to this problem, the SDHC produced a report thatidentifies the key factors slowing down housing growth in San Diegoand the efforts that could help growth, from deferring developmentfees to supporting CEQA reform to stopping theCity from requiring commercial space to be built belowresidential—which requires tools residentialdevelopers don't possess. "Leadership will play a huge role inthis. We need to set a housing goal" and try to obtain it.

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Nathan Moeder, a principal with theLondon Group, referred to his company's recentwhite paper addressing housing affordability and the sea change inSan Diego of middle-class housing becoming unaffordable. "It'sbecome a case of the haves and the have-nots, and the middle classare the have-nots." The question of how to add more housing unitssince we're out of vacant land can be answered by San Diegoaccepting more density, said Moeder. Without it, companies willhave difficulty recruiting talent since there will be nowhere forthem to live within a reasonable distance from where they work andin desirable neighborhoods. "We need the political will to getthings done."

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Michael Innis-Thompson, managing director ofcommunity lending for MUFG Union Bank, N.A., saidone of the main issues that affects home affordability is badcredit, since the cost to borrow with poor credit is high. Still,low-down-payment loans are becoming more popular, and his firmoriginates these mortgages for sale to the secondary market."Interest rates will go up to 4.5% in 2016, close to 5.2% in 2017and 5.7% in 2018," said Innis-Thompson, based on data from the MBA.He said the 10-Year Treasury is more of an indicator of howmortgage interest rates behave than any pending rate increases bythe Fed. "Mortgage rates react to how the 10-Year Treasuryperforms."

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.