LOCATED ON A HILLSIDE BESIDE THE CITY AND ITS MARINA, San Diego's Little Italy is a delightful place. On this particular perfect summer day, you can hear the sound of an artist grinding metal in a studio across the street from a store that resells lofts and condos. Open-air restaurants bustle with lunch trade.

Thousands of people have decided to move to the condos and rentals in Little Italy in recent years, and developers are betting that many more will follow. Lennar and Intergulf recently sold out the 304 condos in their mixed-use La Vita building. Only a few units remain in K. Hovnanian Cos.' fine two-tower Acqua Vista project.

Business and personal life here seem serene, yet some reports suggest turbulence ahead for the condo market here as well as in Washington, D.C., and South Florida. What's missing from these reports in national newspapers and business magazines, though, is a deeper understanding of the economic fundamentals in local markets. (BUILDER takes a look at the economic fundamentals in today's marketplace in a three-part series, “Housing's Wild Ride,” starting on page 154.)

ON A ROLL Yes, the booming condo market in San Diego is unprecedented—there were 3,500 condo conversions here last year, and a similar number is expected this year. But so is the price of housing in this metro region of 3 million, which could muster only 15,587 permits last year. The average price of an attached house in San Diego is only $390,000, compared with $762,000 for a detached home.

You'll probably have to pay a little more for a 1,000-square-foot loft in Little Italy. The three I looked at were in the $500,000 range. But you can walk to the city's finest restaurants. The architecture in these buildings is tremendous. In many cases, you get a priceless view of the Pacific. You don't have to endure a hellish commute downtown. And you can be at the airport in five minutes.

In San Diego, the high end of the attached housing market may be untested, but condos remain some of the most affordable housing choices. Attached housing now accounts for nearly two out of every three new-housing units coming on line in this city, where a detached house costs more than one in Honolulu.

CAPITAL SPENDING Washington is another one of those markets that observers glibly list as poised for a fall. A 1,000-square-foot condo in hip Adams Morgan, near downtown D.C., will run you about $800,000, which seems like a lot of money until you consider your alternatives. You can't get a detached home in a close-in suburb for much less than this.

It seems unlikely that the market will collapse, given the remarkable job growth in D.C. Plus, an incredible amount of federal spending has been pumped into the nation's capital to beef up security in the wake of Sept. 11. Prices for downtown condos are high, but the market hasn't softened yet.

The market that seems the most vulnerable is South Florida, where developers often depend on investor cash to bring buildings out of the ground. Investors gamble that their units will appreciate by the time the building is complete. They count on new buyers to flip the condos, but several industry reports have come out recently saying that this well may run dry within a year and a half.

The high-end condo market in a few places may be vulnerable, but there is no way the national housing market is going to collapse. Housing prices may slow their rapid gains—in fact, they already have in most markets—but that's probably a good thing, because it will bring supply and demand into a closer balance.

e-mail: bthompson@hanleywood.com

Editorial Director

Learn more about markets featured in this article: San Diego, CA.