What a Difference a Year Makes
Michael Lange, a downtown Coldwell Banker realtor, reports three condos (generally the most difficult properties to sell) going in 28, 13 and 11 days—with two at full price and one at more than the asking price.
Tales of buyers outbidding each other surface every day. Last year at this time, home sales were fairly slow and prices were only beginning to escalate, but what a difference a year makes. One reason for the turnaround is low inventory; another is that people who left the area during the lean years are coming back.
The bad news: the Asian financial crisis. San Diego’s high-tech firms, our pride and joy during the recent recession, will certainly be affected. Here’s how it goes: The Asian markets we depend on to absorb our exports have run into hard times. Their currencies are devalued (the Korean won lost half its value last year), and this significantly raises the cost of U.S. goods in those countries. Orders are canceled at our high-tech firms.
At the same time, the devalued currency in Asia makes Asian goods cheaper for Americans to buy, making it harder for U.S. manufacturers to hold the line on prices. Some high-tech firms have already begun to report lower earnings expectations—with the result that many of the superstars of the technological age have lost major value on the stock market.
Technology stocks, of course, are notoriously volatile, and moves in either direction tend to be exaggerated. But when Intel drops from 100 to under 70, something’s amiss. Our own local star, Qualcomm, whose stock price hit 70 a few months ago, shed major points in late December to the mid-40s. One day’s eight-point drop was blamed on the fact that Korea is perceived as a major market for Qualcomm’s CDMA technology.
Says Julie Cunningham, vice president of investor relations for Qualcomm: “It’s difficult to quantify the exact impact. We continue to see strong demand for our products in South Korea, but it remains to be seen what longer-term impact there might be. Wall Street is not tolerant of uncertainty.”
“People are worried that there are a lot more earnings disappointments coming from companies with exposure in Asia,” said Allen Sinai in December, when Oracle dropped a third of its value on its heaviest one-day volume ever (171 million Oracle shares traded hands). Sinai is chief global economist for Primark Decision Economics. At about the same time, 3Com, the largest maker of interface cards (which allow personal computers to communicate over office networks), dropped one-third, and the price of another computer-networking manufacturer, Cabletron, was cut in half. Compaq Computer, which makes more personal computers than any other company in the world, also took a nosedive.
How can this picture be reconciled with the news that many tech firms are still begging for additional employees? Sony in Rancho Bernardo, for example, needs 130 engineers. And it’s planning a $60 million expansion in the summer to produce large-screen computer picture tubes. For this project they’ll need 400 additional workers.
“Sony is so global,” explains Greg Dvorken, public relations representative for Sony Technology Center. And so diverse, including, as it does, 1,000 facilities throughout the world. It does $10 billion in sales in North America alone and $50 billion worldwide. “We were affected more when the U.S. market went down [in October] than by the Asian crisis,” says Dvorken.
It’s a conundrum—as the study of economics usually turns out to be. Some things go up; some go down. It’s hard to generalize. But wouldn’t it be ironic if—just as we are coming out of our recession, just as jobs are picking up and confidence rising—ominous events in the Far East threw a pall over our new successes.
And ominous they are. George Haligowski, CEO of ITLA Capital Corporation (the holding company for Imperial Thrift & Loan) and an expert in Japanese matters—his mother was Japanese, his father European, and his specialty is international trade—likens the closing of banks and brokerages during the past few months to our own dilemma at the closing of U.S. S&Ls in the early ’90s. But the Japanese, holding to the status quo—and hamstrung by old-school politicians, bureaucrats and cronyism—didn’t face the issue head-on. Now, belatedly, banks and brokerages are faced with bad paper, and the government is faced with Draconian remedies.
And it’s not only Japan. South Korea, Thailand, Indonesia and even Hong Kong are in the middle of severe financial crises. The International Monetary Fund (IMF) loan guarantee of $57 billion to South Korea may or may not save the day.
But let’s return to our own good news: the housing market.
“We recovered from the recession later than the rest of the country,” says Jeff Lipscomb, investment advisory associate at E.Q. (Equitable) Financial Consultants Inc. “The good thing about the recession was that it pointed out our weaknesses: relying too much on defense and tourism. Now we’ve done a good job attracting clean businesses—with growth in several sectors, including telecommunications and the golf products industry.”
Lipscomb doesn’t worry much about losing our high-tech markets in Asia. “Are people going to stop buying phones?” he asks. “Only 2 percent of people in China now have phones.” He sees the Asia crisis as an “economic blip,” possibly solved in one or two years.
More like two or three, says Haligowski, “right through ’98 to the turn of the century. The Japanese were overextended. And unlike our RTC [Resolution Trust Corporation] solution, where the government masterminded the sale of failing banks to healthy ones, the Japanese have been slow to move. They buried their problems too long,” he says. “It’s a cultural thing. They way overpaid for buildings in the United States, sometimes granting 100-year mortgages. But the world changed. That type of system lost out competitively.”
And the result? The recent failure of many Japanese banks and two giant financial houses, Yamaichi Securities and Sanyo Securities. “These are major investment firms,” says Haligowski, “like our Citibank. Imagine if our Citibank should fail.”
“They need a Greenspan over there in the worst way,” comments Lipscomb, referring to U.S. Federal Reserve System chief Alan Greenspan.
As for business here, Haligowski reports that, from a banker’s perspective, he sees “a lot of vibrant energy.” All of his 10 California branches are prosperous, as well as the 26 Imperial Thrifts across the country. “These are good times,” he says, “with a lot of capital available. There’s strong borrowing demand with low delinquency—and high construction activity throughout San Diego County.”
Robert Horsman, president and CEO of San Diego National Bank, sees “a lot of real estate projects here at the bank. Big, sizable deals. It feels almost like we’ve returned to the ’80s. But with the lessons we’ve learned, we’re requiring appreciable equities in our real estate deals. We’re seeing a lot of activity in big, single-family tracts, especially in inland North County along the I-15 corridor. And high-end homes—in the $500,000 to $3 million range—are selling like hotcakes.”
Curt Stephenson, senior vice president of Grubb & Ellis, sees two kinds of commercial real estate investment occurring. Wall Street and the pension funds are seeking Southern California property for their real estate investment trusts. And at the same time, local money is building industrial parks in certain pockets where land can still be found—notably Carlsbad, Poway and eventually South County. But land is scarce, and much of what is available is not commercially zoned.
“Land prices in prime North City/ County suburbs doubled and even tripled during the last two years,” says Shaun Burnett, senior vice president of The Irving Hughes Group, “with some buyers opting to overpay for property in the midst of a feeding frenzy, knowing if they didn’t, there were others waiting in line who would.”
His colleague at Irving Hughes, Michael Labelle, agrees: “Nearly everything is leasing up, and the time frame for making a deal for space has become much shorter. Landlords have now adopted take-it-or-leave-it attitudes.”
“For the first time in years we have a strong office market, even downtown. And housing prices along the coast are escalating dramatically,” says Grubb & Ellis’ Stephenson. Residential builders are mainly working in two areas: South County, including the EastLake and Otay Mesa areas of Chula Vista, and North County in Carlsbad and San Marcos.
Kelly Cunningham of the San Diego Chamber of Commerce agrees that housing prices are jumping fast. “The first part of the decade saw a 20 percent slide,” he says. “But I see prices jumping above where they were before. In 1998 and ’99, they’ll be above the ’90 peak. The peak average price for a single family home in ’90 was $233,000. In ’97, the average is already $209,000.”
What happened? Very little inventory, says Cunningham, and a population in-migration, starting in ’96, attracted by San Diego jobs. “We have full employment—and labor shortages. All those construction workers who fled to Las Vegas and Arizona—now we need them back. These are good-paying jobs. The demand most evident is for homes in the $300,000-$400,000 range.” Where he sees an affordability problem is in the high-density scene, where apartment rentals are tight. “The vacancy rate in apartment rentals is 1 percent—and in many areas, zero.”
“The real estate market turned last year,” says Quentin Smith of Coldwell Banker. “It’s like someone flashed a green light.” How does he explain it? “People have significant dollars in the stock market; they’re comfortable their jobs won’t go away.” Smith tells of an ad he placed in San Diego Magazine that came out before the home’s multiple listing went into effect. “The first day the magazine hit the stands I arranged a showing, and the client bought the house right then and there—a $650,000 house, sold in one showing.”
When we asked Smith to give us a list of lower-priced single-family homes, say, under $240,000, along the coastal strip, he could turn up only six—all the way from Del Mar and Solana Beach through Cardiff, Encinitas and Leucadia. He found 40 at $300,000-plus, seven at $240,000-$300,000 and six in the $150,000-$240,000 range.
“You used to be able to buy something fun [and affordable] along that coastal strip,” he says wistfully. No more.
His prediction: Areas like Adams Avenue or neighborhoods in El Cajon will be the new hot spots—“pedestrian” areas where you can walk to a coffee shop or a movie. If you can’t afford the coastal areas, these neighborhood charmers will do very nicely. Smith feels buyers will be downsizing, buying less furniture, no longer willing to be strapped with giant dining tables and extensive belongings. Smaller houses will be in demand.
One of our correspondents asked us to check on how many people are using the new capital gains exemption of $250,000 (for a single taxpayer) and $500,000 (for a married couple) that went into effect in August 1997. It would be assumed that anyone sitting on a house that had appreciated vastly in value would now rush it to market.
“You’ll see a lot more of those homes hit the market after January,” says Smith, who believes people aren’t aware of the new tax exemption yet. But real estate people are braced for a rush in the spring.
What could interrupt this feeling of prosperity and rush to buy? “One of the things that could happen,” says Leon Reinhart, president of First National Bank, “would be a drop in the stock market. That could change everybody’s outlook quickly. We tend to measure our net worth by a successful stock market. But right now Japan’s banks are reeling from financial problems. They estimate $200 billion to $400 billion in problem loans. The Thai market is down 70 percent this year, with that currency devalued 38 percent.
“A lot of money managers [of mutual funds] have invested in Asia. Now the United States, the IMF and other entities are sending billions of dollars in rescue money. As it did in Mexico, this will generate confidence. It’s not the actual money itself—Mexico never even used more than $20 billion of the $50 billion the IMF made available. But investors develop confidence, and instead of money leaving the troubled country, it reverses the flow.”
San Diego is fortunate in this respect: The Asian market makes up only about 20 percent of our export market. We do much more business with Mexico and Canada (50 percent). Many feel this will minimize the Asian effect on San Diego, unlike what could happen in the Silicon Valley and San Francisco, with their vast exports to Asia. But any prolonged slump could affect some local industries—typically electronics manufacturers and golf equipment suppliers.
Reinhart has special advice to San Diego businessmen: Because of a NAFTA ruling that all product for maquiladoras in Mexico must come only from North America by the year 2001, there is a need to find sufficient North American suppliers by that time. Currently, 40 percent of the raw material sent in to be finished in Mexico comes from Asia.
“That’s where the opportunity is in San Diego,” says Reinhart. “Anybody in business here who produces anything at all should be looking to Mexico. Only because of ignorance, they’re not doing it. Out of the 3,500 maquiladora plants in Mexico, 950 are in Baja—only 30 minutes away. Yet we don’t do much business with them. Texas does 10 times the business across its border. We are provincial to our own detriment.”
In an interview with the Washington Post, Phil Schettewi, managing partner of Loomis, Sayles & Company, sounds a hopeful note. “The technology revolution that started 10 years ago is not ending today. It’s not ending tomorrow. It’s not ending next year,” he says. Despite the recent volatility in high-tech stock, he urges investors to buy. “But carefully,” he cautions.
Alan Gin, economist at the University of San Diego, sums up our situation: In San Diego County, we had a gain of 25,000 jobs in 1997. He estimates 24,000 more for ’98. Residential building permits, which had been stuck in the 6,000-7,000 area for five straight years, will number 10,000 in ’98—the highest figure since 1990.
“With good job growth and tight housing, yes, we have some problems,” Gin admits. “And the Asian financial flu will possibly hold back some San Diego manufacturers. But the problems we have are caused by booming economic activity. That’s much better than the other way around.”
Our own office prophet has a simple way of forecasting the future: She judges next year’s prosperity by the quantity of holiday lights displayed on houses. And this year? “It was a very sparkly Christmas in San Diego,” she says.