Looking Back at San Diego's Last Housing Bubble

For anyone who lived in Southern California during the early 90s, you know first hand what a housing bubble can look like. During the 80s real estate prices in Southern California flourished, but with the shaky economy in the early 90s and the reduction in defense spending thereby leading to closures of many bases and defense contractors in LA and San Diego, prices plummited. In San Diego, certain neighborhoods saw price decreases of over 36% from the late 80s highs to the mid-90s lows.

A recent article at the San Diego Union Tribune, Previous Bubble Burst May Provide Clues, examines the real estate downturn in the 90s. The article, sadly, doesn't provide any insight into the current bubble, but rather looks back in history 15 years, enumerating the causes of the last real estate bubble and the resulting outcome.

The last bubble was precipitated in part by jobs moving out of the area, and in many articles I've read the 'experts' have said that a bubble bursting is unlikely now in SoCal thanks to a strong economy with a growing job base. However, I wonder if the market could still take a hit even in today's economy solely because of the speculative buying with these silly 'no money down' loans such as the Option ARM. The Federal Reserve has even sounded the alarm on risky loan vehicles, like the Option ARM and Interest-Only Loan. From Feds No Longer Dismiss Talk of Housing Bubble:

In May, the Fed and four other regulatory agencies issued an unusual joint statement, warning that financial institutions "may not be fully recognizing the risk" inherent in aggressive lending secured by rapidly rising home values. ... Regulators are working on additional guidelines for non-traditional loans issued by primary mortgage lenders, a spokesman for the Federal Deposit Insurance Corp. said. The proliferation of interest-only, "negative amortization" and various hybrid loan products is capturing the attention of regulators because they rely heavily on rapidly increasing home values and appeal to buyers who otherwise would not be able to afford a home. Because borrowers who get these loans pay no principal — and often put little or no money down — they easily could find themselves "underwater" if home prices decline, meaning they owe the bank more than the home is worth.

One has to look no further than the San Diego skyline to see building after building of condos being erected. I read that over a third of new downtown condo purchases were being done speculatively: with little or no money down for the purpose of investing, armed with the knowledge that the rent these places can ask is drawfed by the mortgage / property / HOA fees costs. What happens to these people and to these properties when the bubble does burst? And what will that do to prices in general in the market here in SoCal?

Interesting questions that will be, I'm afraid, answered soon enough.