I was invited by the moderators of this blog to join in the discussions as a participant-at-large. My name is Fred Adler. I am NOT a Realtor, real estate investor or builder (except for some commercial real estate stocks in my portfolio), or anyone that directly makes any money on the buying and selling of real estate. I am just another average person who deals with real estate issues for my personal home and for my business. Oh, I forgot. I am also the owner of a small biotech company in San Diego with 18 employess. And finally, no, I am not “rich” enough to move downtown for an ocean view.
I would like to start into this blog trying to stimulate some discussion on the San Diego real estate markets from the perspective of a business person that has to engage the realities of them as a “user” and not from the perspective of a “provider”. While it has been delightful to sit and watch the “net worth” line on my Quicken go up the last few years due to appreciation of my San Diego home, one needs to step back and consider the “downsides” and the “realities” of the situation. I will start with one perspective which is as a small business owner.
As an employer in San Diego of modestly paid “biological production workers”, I will tell you that the skyrocketing home prices are a definite deterrent to company growth. My production employees cannot afford to buy homes here even on two incomes. The most recent San Diego Employers Association Salary Survey indicates a weighted average wage for manufacturing non-exempt (supervised) employees of $26,189 per year. So my first conclusion : San Diego will NEVER be a large manufacturing site for biotech since it is just too expensive to live here for the workers. They want homes just like you and me.
We also research and develop diagnostic test kits (you know “science stuff’”) that we get approved through the FDA, the European Union and individual countries like China. My employees are again paid above the weighted averages but the weighted average for a laboratory technician is $43,295 in the 2006 survey. Again, it is pretty difficult to buy anything in San Diego on that salary. Think twice before you encourage your kids to get a “biology” bachelor degree. It doesn’t pay that much.
You might at this point say why don’t you just pay them more? Well, that is pretty darn impossible also. Governments around the world dictate our prices in their reimbursement schedules. We don’t get to charge what we would like to in order to pay our employees more. We can only charge what governments allow us to charge. Diagnostics consume about 4-5% of total medical costs. It is a relatively small business in medicine. We pay above the local averages and it just is not enough for homes for our employees. Think about what it costs you for your mortgage and back into the numbers. The averages for less educated and less trained people are even lower. I have those averages also. What do these people do? They rent.
The next deterrent to business growth is the obvious. If the prices of property go up, so do operating costs for things like rent and property taxes. Our “property costs” for the business go up 4 to 5% each year. When the markets in San Diego were depressed last time (remember 1989 to 1994?), our company could file for lower property taxes through our landlord. We had more cash. Cash is king. Cash flow is everything. A line on Quicken is just feel good stuff. As the Fed Chair says, “a wealth effect”…………. not cash.
I plan to scratch at another “irritation” next time…… Is it really more net worth if the replacement costs rise at the same rate as your house and you have to live somewhere? House value only enters cash flow if your living expenses decrease (move to Iowa or North Carolina) or if you check in at the Soylent Green factory.
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Welcome to the Blog, Fred, and nice photo! I have no doubt you will add spirited discussion and stir things up a bit. Nice post, by the way. And, unfortunately, I am old enough to understand your Soylent Green comment.
Let’s talk about the medical field. Fred brought up the salary of a lab tech at $43,000. So let’s go to the top of the medical field, the doctor. Assuming an average salary of $150,000, after tax take home is $8000/month.
taking the Mission Valley 1400sqft detached condo that was featured in the Union Tribune. The asking price is $619,000. Assuming 10% down, the monthly payment would be $3500 at the current 30 year fix of 6.5%. Assuming no mello roos (a big assumption), property tax would take out another $500/month. Going conservative, we’ll take out $300/month for HOA and insurance. The typical med school loan repayment will take out another $700/month. Transportation cost, ie. gas, car payment, insurance would take out another $1000/month. Added together, that’s $6000/month of fixed cost, subtracting from the $8000 take home, our typical doctor now has $2000 to spend on utility, food, cloth, and Starbuck.
So a medical doctor CAN afford this 1400 sqft detached condo. But he and his family will be living paycheck to paycheck just to have the privilege of living in a 1400 sqft detached condo in Mission Valley. That is the reality of San Diego’s housing prices.
Now here’s the million dollar question. If a typical doctor can only afford a detached condo here in San Diego, who are the folks buying the million dollar homes?
It’s too early so I’ll probably screw this up but here’s one answer. 1.) Doctor has a wife (or “life partner”) who works, adding some $$ to the monthly take. 2.) Doc either comes in with more down payment and/or decides to take on a more exotic (read higher risk, lower initial payment) loan, w/ no pre-pay penalty. 3.) Doc then refinances prior to the end of a 3 or 5 year period, knowing that his income will be going up while interest rates hopefully are down (a gamble, yes). Not perfect but probably a fairly common scenario for Doc’ and many others in San Diego. The two income family here is almost a given considering prices. But your point is well taken.
Point taken, Jack. I ask myself this on a daily basis. As I look around my neighborhood, that I could barely afford in 2000 but could never afford today, I often wonder how these other (younger, I might add) families can afford the homes. For those that watched their equity grow by leaps and bounds during the last frenzied cycle, the answer is probably “funny money” – Sell high, but high. Big equity allowed for a reasonable down payment at presumably a lower interest rate. As Steve points out, the expectation of higher income in the future calmed the payment fears of the “squeakers”, who on paper, could barely afford the monthly payment. Then, of course, there is the risk-taking contingent who embraced the interest only loan or the ARM with the ridiculously low start rate (many times, because that was their only way of qualifying for the loan), tomorrow be damned. Well, today is tomorrow, and now we see more and more people living in homes they can’t afford or in homes they must sell with no or negative equity. Obviously (to me anyway), the answer to your million dollar question is that fewer and fewer people can truly afford the million dollar homes, let alone the median priced home, which is undoubtedly one of the largest factors in our changing market.
Steve, I certainly seen some of those senario around my circle as well. Of 10 MD’s that graduated from residency training in 2003 that I know of, 4 purchased homes. 2 had spouses that were also MD’s, 1 was much older and was able to sell and move equity to the new home, and 1 was able to purchase after his parents sold some properties in the bay area. The 6 others are either living with parents, renting rooms from older siblings, or renting period. Steve, I think you will have to adjust that 2 income comment to 2 physician level income. Because in reality that is what it takes. if the wife goes to work, and she can’t pull in at least $100,000, she may as well not go to work because after child care costs and taxes, anything less would be a wash.
Kris, I think you truly understand how a buyer truly feel, empathy like that will bring you the buyers when they feel the market is truly right for them.
Dear Dr. Jack,
I obviously hit a “sensitive” spot with you. You are right. I think I just posed a question for the future of our value trends. I work all day making “stuff” and trying to sell it and as long as there are buyers, I am fine. The delicate balance of supply and demand still relays on supply at reasonable price or at least at a price that the “market” can absorb. A San Diego full of nothing but married couples made up of The Doctors Jack is fascinating but unlikely. We still have the average incomes which cannot afford to buy unless they have a windfall.
So keeping “average in mind”, what is my daughter to do when she started her first job at the low $30’s graduating in the top of her class?
Not only are we likely to have to pay for the care and maintanence of our parents who did not “save” enough, but now we have to “help” our kids to survive San Diego prices. I am really thinking about this now since the first college kid who immediately got what any normal person would call a “good” job (reasonable salary nationally, good benefits, good environment) “rebounded” in order to save for that “down payment”………and I was able to pay for her college.
Perhaps what the future holds for us is like what I have observed in Europe dealing with my distributors and friends there for over 20 years. In Europe, it appears that houses have become an “inert” asset. They are an “insurance” policy against catastrophe. Properties are passed down within a family even if there is a relocation. The property either generates “cash” from rentals to subsidize living elsewhere or acts as a “given” place of residence for people in that family. This doesn’t do much for “turnover” (sorry about that) but it was the incredibly high price of houses that drove this evolution. This is how my 30-40 Euro distributors explain it to me. An aside: in Italy they price often by the square centimeter in the older metropolitan areas. My distributors are amazed how “cheap” San Diego is compared to Mediterranean property.
It should be interesting the next several years.
This mornings SD Union had an article on the biotech deals going on in Florida. But it mentioned that the industry contributes 39,000 jobs to San Diego also. I agree with you that we will probably not be a biotech mecca for “bio-widget” assembly, but 39,000 jobs is not pocket change. So, what’s the average salary for these employees and are they all in research??
Here is the 2006 salary survey again. First if you consider that vast majority of biotech companies in San Diego are not profitable entities and that in the U.S., FDA close to 90% of them have less than 50 employees it puts it into a frame of reference. In San Diego, the weighted average for “chemists” (degree) is $61,000. I stated before that a Laboratory technician in those companies gets a weighted average of $43,000. It is close to that latter number for Research Laboratory Technician (degree), $42,500. A Laboratory Assistant gets an average of $27,000. Most of the biotech in San Diego is in developmental phase (numbers of companies) and as such are weighted away from production workers. But even biology degree or chemistry degree people who are not the few “senior” people in these companies make a “modest” wage. Sure, 39,000 jobs are nothing to sneeze at, but they are comparable to teachers, firemen and policemen who we always use as examples of those struggling to buy a house in San Diego. My daughter is in that group financially and will be for quite a while unless she moves for “more affordable standard of living” and I suspect that 40-50+% of UCSD graduates who were lucky enough to get jobs last year straight out of school fit right into the $25,000-$45,000 salary range. Most of them have $50,000+ in educational and credit card loans at graduation. It is a tough situation for the future of this “irrational exuberance” in the real estate market.
Fred: I don’t disagree that there has been irrational exuberance in the SD reak estate market. No doubt about it. Hence, the current adjustment. Without the assistance of parents and/or an inheritance, a first time buyer is extremely limited. But it was this way when I tried to buy my first home here in 1980 (a 400+ sq. ft. Studio condo bought for $40,000). Add 14% + interest rates (at that time) to the equation. But eventually, that studio condo sold for $60,000 and I “moved up” to a 640 sq. ft. 1 BR unit, a palace compared to the studio. Kris eventually moved in and both lived there for several years before making the “big plunge” into a very expensive $155,000 townhome. Without boring everyone to tears here, the message is, when you are starting out, THINK SMALL! We can’t all start out with a 3 BR, 1,200 home or condo.
I checked the MLS and found that there are 32, 1BR condo’s on the market in Pacific Beach listed for under $300,000 (starting at $239,000). Same with Mira Mesa – 32 condos listed from $185,000 – $300,000. In Scripps Ranch there are 7, 1BR units listed for between $237,000-$300,000. Now I recognize that it’s still a lot of money. But who says that a recent graduate is “entitled” to buy something for $600,000. No, they can/should start small, like the rest of us had to, and eventually build up equity as, in theory, their income increases. A $37,000 down payment (yes, maybe with the help of parents) gets a kid 20% down on that $187,000 condo for sale in Mira Mesa. $46,000 (20%) down gets you a condo in Pacific Beach. Think about it – PACIFIC BEACH. We all had humble beginnings and we worked very hard to “move up”. It’s the same today. Think small, be patient and move up from there.
I can appreciate a good post when I see one. bravo!
Austin is fascinating study for those that think outside of the San Diego market. The only reason that I know about it is that my nieces and nephews on my wife’s side all have bought their starter houses there. Best place in Texas. The “dirt” is probably undervalued. If a two by four is the same price or close to it at most Home Depot’s, the price differential in square foot price is in the holder’s perception of the value of the “dirt”. I think that given what is said about “boomers” eventually flocking to University towns where the “dirt” is a little cheaper (security of a university town, convenience to the necessities of life, slower pace, atmosphere), you are sitting in a desirable location compared to those horrible desert places that lure the unsuspecting snow birds where the “sand” is overvalued. All the nieces and nephews are in the market in reasonably priced homes………….my kids are envious.
Pusuant to the continued pursuit of “where is the bottom”………………Yahoo Finance did a good piece today on 4 myths of real estate. Since I don’t want to infringe on their copy, I just give you the link: http://biz.yahoo.com/weekend/realbubble_1.html
The net of it is as it has always been: If you love a house and can afford it, buy it and live in it. If you are really an “investor”, please diversify your investments so I don’t have to support you with my tax dollars.