San Diego, CA: 5.8% Return on Investment (2011)
San Diego is experiencing many of the same fundamental problems as Los Angeles, but with a lower degree of severity. The budget problems experienced by the state of California are affecting all of the major cities in the state, but San Diego is expected to be significantly more resilient. With a higher level of general affluence than Los Angeles, San Diego is contracting less severely in 2010, and is expected to resume a growth trajectory more quickly after the expected bottom in 2011. The city also carries a more favorable ratio of rents relative to market values than Los Angeles, resulting in a considerably lower rate of value erosion for investors.
The value trend for San Diego since the year 2000 has been one of growth to a peak in 2005, followed by a steady correction that accelerated after the financial crisis of 2008. The city has many sources of employment and commerce, not the least of which is major military installations for the US Navy and US Marine Corps. The general desirability of San Diego as a place for people to live and vacation will make it one of the first areas to emerge from the financial downturn. This places the city in a position of relative advantage in comparison to other markets in California that are experiencing much more financial difficulty. Currently, approximately 37% of listings in San Diego are foreclosures. This compares favorably to other markets in California.
However, San Diego still represents a market with values that that are very high relative to cash flows from rent revenue, and are still contracting. Values are expected to bottom in 2011, with a subsequent regression back toward pricing equilibrium. This has the potential generate some leveraged appreciation, but still requires investors to absorb substantial negative cash flows while that appreciation is taking place. Furthermore, those gains can only be realized if the property is sold, which will involve transaction costs and trigger a taxable event if the property is not held for a sufficient period of time. While San Diego is an attractive city to visit, it is not the most favorable place for income property investing.