According to the S&P Case-Shiller Index, house prices in San Diego have dropped by 34.1% over the past three years. Based on that fact, one must conclude that the metropolitan area's housing bubble was one of the largest in the country.

Of the 20 major metropolitan areas surveyed by Standard and Poor's, only Las Vegas' 35.3% drop for existing home prices, over the same period, was larger.

In response to this collapse in housing demand, employment in construction has fallen to levels last seen five years ago. At the same time, household wealth has eroded as house prices fall and the borrowing climate becomes more restrictive.

This situation has pushed San Diego's local Index of Consumer Confidence down by almost 50 basis points since May 2007. In turn, as consumer confidence declined, consumer spending slowed and employment in trade and transportation fell by 4,600 jobs.

Looking ahead, the University of San Diego's Index of Leading Indicators has declined, due in no small part to weakness in building permits, initial unemployment insurance claims, stock prices, consumer confidence and help wanted advertising. When combined with the effects of the persisting restrictive lending climate, the index suggests that both consumer spending and residential construction will remain in the doldrums until well into 2009 and probably into 2010.

At the same time, the outlook for commercial construction also appears to be deteriorating. Significant increases in space over the past few years have boosted the metropolitan area's office vacancy rate to 16%, its highest level since 1996.

Given the sustained drop in year-over-year growth of office-based employment during the past nine months and the escalating office vacancy rate, it is unlikely that commercial construction will exhibit significant growth until mid-way through 2010 or early in 2011. This outlook is reinforced by the fact that the cost of doing business is higher in San Diego than it is in all but 11 of the 200 largest U.S. metropolitan areas ranked by Forbes Magazine.