by Calculated Risk on 8/07/2005 02:39:00 AM

The Sunday LA Times features a story on the slowing San Diego housing market.

John Karevoll, chief analyst at DataQuick Information Services in La Jolla, which tracks home prices, called San Diego "our statistical canary in the mine shaft."

"It is further along in the current cycle, and what happens there could predict what will happen elsewhere," he said.

Of course San Diego could suffer more than other areas:

Now, several factors could cause a more pronounced slowdown here, analysts say.

One is the region's far-below-average level of affordability. By one measure, only 9% of households can afford the area's $493,000 median home price — the level at which half of all homes sold for more, half for less. By contrast, affordability statewide is 16%; nationwide, it is 50%.

Another worry is the region's high level of risky loans. San Diego has been a standout in the use of unconventional lending. The region ranks No. 1 in the use of so-called piggyback loans, which let borrowers with low down payments finance a home purchase without paying for mortgage insurance. And the majority of buyers in San Diego still use loans with an "interest only" option, a type of adjustable rate mortgage in which borrowers need only pay interest in the first few years but could see the monthly payment mushroom in later years.
...
"Those of us with long enough memories know that real estate is cyclical," said Mark Milner, PMI's senior vice president and chief risk officer. "But we've never seen a cycle with so many of these kinds of loans, so nobody knows how the market will react if there's an economic shock."

And some important comments on jobs:

... a shock could come from a wave of job losses. Although San Diego added 20,000 jobs between June 2004 and this June, the biggest gains were in real-estate-related jobs such as construction, according to Hanley Wood Market Intelligence, a research firm.

Analysts say a deflating housing market could reverse that job trend, much as a contraction in the aerospace industry touched off a Southern California housing market downturn in the early 1990s. San Diego home prices were virtually flat for six years.

Virtually flat is being generous (see next post).