I just got off the phone with a bright Realtor who specializes in the Downtown San Diego real estate market.

Denny Oh, of Prudential California Realty, writes a weblog called www.SanDiegoh.com.  He submitted a post to the weekly Carnival of Real Estate.  This week, Matt Padilla of the OCRegister, selected Denny's article:

6 Reasons Why Downtown Isn't Overbuilt

In this article, Mr. Oh cites that a reduction in inventory and  strong pre-sale market supports the current pricing in the Downtown San Diego real estate market.  He notes that the developers are not  controlled by debt (they've paid off their loans) and are not subject to the selling pressures that come with a construction loan.  Most intriguing to me was that the Downtown San Diego residential community will triple in the next 22 years.

His summary is enticing:

Is all of this new to you? Does it seem to contradict what the Union Tribune says? There is no bubble and in my opinion, Downtown is not over built. Yes there’s a lot of inventory coming onto the market, but it’s spread out over time. In addition to this, there are very few high quality products coming on.

Once San Diego gets its corporate side going, which it slowly is, Downtown San Diego will be one of the nicest, most sought after metropolitans in the nation. We’re young, but we’re going to be great and you should take advantage of it while you can afford to.

In my opinion, buyers will have the best deals from now, through 2008. If you have any questions, or comments, I’d love to hear them. And if you need someone who knows and works the Downtown market, I’d love to get in touch with you.

I think that the real test of proper pricing for Downtown San Diego real estate is revealed when we analyze properties like a long-term investor may.  We are getting close to parity here.  If a property can create net positive cash flow, with a 20% down payment, and a a current market rate, interest-only loan, the game's over.  Long-term investors will flock to that purchase no matter what the near-term pricing does.

Here's why.  Investors believe in the long-term viability of the Downtown San Diego residential market, they just don't like the short-term negative cash-flow.

eg:   The unit can produce $2150/month in rent, what is a "safe" purchase price?

Let's reverse engineer this question:

A 7%, interest-only loan, will cost $5.83 per thousand.  Taxes. .83 per thousand.  Estimate .83 per thousand for the condo association fee (which may be high). This brings us to total carrying cost expenses of $7.49 per thousand.  Depreciation, however, can save $1.06 per thousand for someone in a combined, 35% marginal tax rate (check with a tax advisor).  The net carrying costs would be $6.43 per thousand.

Now, divide the $2150 by the net carrying costs per thousand.  Youll come up with a loan amount of $334,370.  Divide that loan amount by .8 (to reflect the 20% down payment) and you get a purchase price of $417,630.

Let me offer some disclaimers here:  I'm not saying that the price of $417,630 is the absolute bottom of the market for this property.  What I'm suggesting is that the  property becomes attractive to long-term investors at that point.  Buy and flip types will be sorely disappointed if they try this at home.   I'm also saying that you may not be able to get this particular property for this price.  Real estate has utility (as a place to live). A premium may be built into the pricing to reflect that utility.

Cash flow analysis, as a long-term investor might perform, is a good way to analyze properties in this market.  It demonstrates a pricing support level.  Nothing replaces the value of a local real estate professional.  Based on what we see from Mr. Oh's article; it is clear to me that he has a grasp on the Downtown San Diego real estate market.