Market conditions can't get much worse in San Diego. Or can they? By the end of July, the San Diego County market had dried up so much that many public builders laid off workers–including top executives–consolidated offices in Southern California, and hunkered down for hard times as investors disappeared, buyers stayed home, and inventory piled up.

“We've borrowed from this market for this year. This is going to be a fairly rough year. But it's not going to be like '90 or '91,” says Sharon Hanley, research analyst for the New Housing Monitor in Oceanside, Calif.

Something had to give in a county where the median price of an existing home is more than $800,000. Sales were down 44 percent in May from the previous year, according to HWMI. “If you had asked me two or three months ago if I had seen it coming, I would have said, ‘No,' ” says Robert Schoonmaker, president of Building Industry Associates, a California recruiting firm.

But there is no hiding from the market's woes now. Don Tomnitz, president and CEO of D.R. Horton, called San Diego County “a very, very weak market for us,” in a conference call with Wall Street analysts in July. It was so weak that in June, D.R. Horton wrote off a number of deposits on land it was planning to buy and consolidated operations in Southern California, in effect, turning San Diego into a satellite market.

So just what happened in a community where the sun shines nearly all the time, where the water glistens from the bay and the ocean, and where people come to live and never want to leave? Surging inventories and unheard of gains in housing prices.

While the San Diego economy is basically sound with a giant military presence, defense contractors, and high-tech companies, investors began pulling out and the existing inventory grew too fast. As San Diego builders began to re-create downtown with large building conversions or new condos, demand began to melt.

“The recent San Diego housing boom was largely fueled by historically low interest rates and investor activity. The end result was one of the lowest affordability rates in the country,” says Stephen Carr, managing director for HWMI.

Conditions in San Diego appeared to have stabilized in June, according to Ivy Zelman, an analyst at Credit Suisse First Boston. Nevertheless, she notes in her monthly newsletter, Housing Headline News, that “conditions remain challenging, as orders deteriorated amid falling prices.”

Sherm Harmer, a San Diego developer and president of Urban Housing Partners, says it's important that builders push ahead, read the market, and avoid building generic projects if they want to succeed in these tough times. Make sure it's a niche product, and it's as creative as they can make it, he says.

“We'll go through a wave right now like the '90s where everyone upgrades their product [and] their marketing, [as well as] streamlines what they were doing. Now we're in a period where you have got to do it better, and you have to do it more efficient,” Harmer says.

Market Snapshot; San Diego County Year-over-year change

(March 2005–2006)

  • Housing growth ratio: 4.14
  • Job growth: 1.8%
  • Building permits: –29.4%
  • Inventory: up 73%

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