San Diego Real Estate – Will Prices Ever Get Back to Their Prior Heights?

I think the number one factor that will keep a cap on home appreciation in San Diego and California is that the severity of our housing bust has clearly broken the myth that San Diego and/or California homes could never really drop. Once San Diego housing does bottom, it may be many years before we see any measurable, sustained housing appreciation.

Charles Hugh Smith (www.oftwominds.com) recently wrote: "Bubbles do not re-inflate in the asset class which just popped. It is simply a truism that bubbles never reflate, ever. Tulip bulb valuations did not rise to stratospheric heights after the Tulip Craze popped, and the Nasdaq dot-com bubble did not reinflate, either, for the very good reason that bubbles are never based on rational valuations–they are based on the psychological state of mania which cannot be reinstated once lost."

San Diego and California are now experiencing rising unemployment and huge deficits, which have caused higher taxes, increased fees and cuts in services. This is not a conducive climate for home appreciation. Also once we bottom, there is the very real possibility that the Obama administration will push for a sliding scale of allowed tax and mortgage interest tax write-offs.

In 2005, the latest statistics for this information, it was estimated that:

* The mortgage interest deduction will cost the Treasury $72.6 billion, according to congressional estimates.

* The $250,000 and $500,000 tax-free exclusions of home sale profits for single sellers and joint filers, respectively, will cost $23 billion.

* Property tax write-offs cost $20 billion, and tax subsidies for local and state housing bond programs, account for $1 billion.

When a congressional committee examined the distribution of homeowner benefits for 2004, it found that people earning $200,000 and more a year – just one-half of 1% of all homeowners filing for deductions – pocketed 22% of the $70.2 billion in write-offs in 2004.

In 2007, Rep. John D. Dingell (D-Mich.) unveiled a draft of his "carbon tax" legislative reform package. Part of this draft legislation was a phase-out of the mortgage interest deduction on large homes. The phase-out schedule for the mortgage interest write-off begins with houses of 3,000 square feet, which would lose 15 percent of their deductions. The proposal ends with houses of 4,200 square feet and larger, which would receive no deductions at all.  With the housing market stabilization, it seems likely that some type of "green, carbon tax" legislation will be implemented, not necessarily to help the environment, but as a guise for increasing taxes to pay towards our enormous spending deficits.

Now the Obama administration has proposed cuts in the mortgage interest deduction. Obama wants to limit mortgage interest write-offs for upper-income households.

Under the Obama plan, deductions would be capped at a 28 percent tax rate, even if the taxpayer is paying taxes at a 35 percent marginal rate. Plus, if this goes through, how fast would California and other "tax & spend" states be to revise their state tax codes to align with the federal code?

This will be a real body blow for housing appreciation. Mark my words, if passed, this is just the first step towards total elimination of the mortgage interest deduction.

Millions of baby boomers are looking at delayed retirement and pension and savings shortfalls. They are reaching the age where they become net home sellers, not buyers. This is also not an environment in which one would expect housing prices to take off.

Homes do not appreciate automatically. A lower median price in a market does not imply that those homes appreciate. Japan experienced 12 years of declining realty values, and Japanese consumers had higher savings and lower debt levels than our current population.

It seems certain, at least in San Diego and California, that housing density will rise in the future. Fewer people will feel the need for a 3,000+ sq ft McMansion to fill up with junk they don't need.

Once everyone forgets the results of our collective, horrible silliness, there will be another San Diego housing 'bubble' or perhaps more accurately, in light of most recent bubble, a "mini-bubble" eventually…some things never really change.                                    San Diego real estate agents