Experts divided over San Diego's outlook
(Notice, the tax break isn't mentioned in this article, just interest rates, appreciation and flaky mortgages!)
By Roger M. Showley, Lori Weisberg and Emmet Pierce
UNION-TRIBUNE STAFF WRITERS
January 1, 2006
As San Diego County bids farewell to a five-year housing-price boom, the one question that lingers is whether the local real estate market is speeding toward a crash or gliding to a soft landing.
Some national real estate experts have placed San Diego on their list of cities that can expect price drops, which hasn't happened in the local market since 1995. But those based in California are more sanguine. They acknowledge some warning signs such as expected mortgage rate increases but foresee no collapse, pointing to a healthy local economy.
County median home prices have more than doubled
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and home sales have begun slowing.
Across the country, economists are closely watching the county's real estate market, which defied some predictions more than a year ago by maintaining a price surge that went far beyond what many thought was possible.
Now, concerns are being raised that lenders have gone too far in making mortgages easily available through a host of new products. Analysts are alert for any signs of trouble, such as an increase in mortgage defaults.
Among the doomsayers is Fiserv CSW, a market research firm in Cambridge, Mass., that last month predicted San Diego's housing prices will drop 3.4 percent this year and 5.7 percent in 2007. The firm concluded, in a survey completed for Fortune magazine, that San Diego is second to Las Vegas as the most vulnerable metropolitan area out of 100 analyzed.
The company's experts include Yale University economist Robert Shiller, who has for a few years predicted a major housing-market downturn, especially in "frothy" places such as San Diego, where median home prices have more than doubled in five years.
In another analysis last month, Cleveland-based National City Corp. concluded that San Diego prices are 46 percent higher than local incomes can support. The company said the median home price here should be nearly $150,000 less than the actual price reported in the third quarter of 2005.
Closer to home, however, market watchers see a rosier picture. They believe that prices are likely to continue rising, just at a much slower pace, because of continued demand for homes fueled by job growth.
"I'd say housing is overpriced, but whether or not that implies that prices are going to crash is a different question," said University of San Diego economist Alan Gin.
He and other analysts predict prices will increase this year between zero and 5 percent, which could raise November's median home price of $518,000 to about $544,000.
Last year's overall rate of appreciation slowed to 7.5 percent, according to data being analyzed by locally based DataQuick Information Systems. That was the first year since 1999 that the county had a single-digit percentage gain – a far cry from a year earlier, when the median price jumped a record 21.1 percent.
"The boom part of the cycle is over," said DataQuick analyst John Karevoll. "Most of the gains this time around are behind us. Now the question is how much of those gains do we get to keep."
A 5 percent appreciation rate this year would be the lowest since the late 1990s, when San Diego was recovering from a long real estate recession and median home prices were under $200,000. Karevoll pegs the chances for a "soft landing" at 80 percent.
If an economic downturn does come, those most at risk are middle-wage borrowers who in recent years have relied heavily on highly leveraged loans to attain homeownership.
Often called "creative" or "non-traditional," these loans have allowed buyers to purchase homes in high-cost markets such as San Diego with less money down and little documentation to support their creditworthiness.
Graphic:
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Monthly averages for 3-year, fixed-rate mortgages
The trade-off is that the buyers with unconventional loans take on a higher risk of default if mortgage rates climb. Some analysts warn that such loans haven't been tested during a sharp downturn.
Watching the trend with mounting concern, federal banking regulators stepped in on Dec. 20. Five institutions, including the Federal Reserve, issued a "guidance" to lenders. In part, it says tighter regulations are needed for interest-only loans, payment-option adjustable rate mortgages (ARMs) and simultaneous second mortgages that reduce down payments.
"We have seen the mass marketing of these loans and the growth of these loans and determined it was appropriate for us to take a closer look," said Barbara Grunkemeyer, deputy comptroller for credit risk at the Office of the Comptroller of the Currency, who led a multi-agency task force that studied the issue.
Regulators are seeking comments from lenders before making the notice final, but substantial changes in the document aren't expected, said David Barr, spokesman for the Federal Deposit Insurance Corp. Once finalized, it "applies to all banks and savings and loans and their subsidiaries, so ... it does have pretty broad reach," he said.
The regulators have "joined a chorus of critics on the impact of some of the new (lending) products," said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies. "This ranges from credit-rating agencies to consumer-advocacy groups, all with a common message. These products, particularly adjustables ... all add substantially to the risk to the home buyer."
Sensing a market slowdown, Shannon Bodnar and her husband, Alan, decided in April to put their Scripps Ranch home on the market and cash in on nearly four years of equity gains. They went ahead with a planned room addition and upgraded their 1,775-square-foot home with hardwood floors, new carpet and window coverings. New landscaping was put in the front yard and a hot tub was installed in the back.
"My husband is in grad school and due to finish next December, and we felt there was a good chance we wouldn't be in San Diego after that, and we didn't want to wind up not getting the most for our house," said Shannon, 33.
The couple's house went on the market in late June at an asking price of $699,000 to $735,000. By September, it had not sold and the couple brought in a new agent. Twice, the price was reduced, and by November the house sold for $660,000.
"We were hoping to be ahead of the curve, and I don't know if we were," she said.
The buyers were Suzy and John Marshall, both retired, who decided to return to San Diego after living abroad while John worked as a loss-prevention manager for the Army and Air Force exchange service.
"We realized we were buying at a higher price, but right now it doesn't matter because this is the home we'll be in for the rest of our lives," said Suzy, 54. "People always want to sell their homes for more than they paid, and I think the market now is not allowing them to make that windfall profit."
San Diego's real estate market, which has long favored sellers, is beginning to lurch toward buyers like the Marshalls. Today, the number of homes for sale hovers at 14,000, 55 percent above year-ago levels. For buyers, that means more choices.
It's also taking about two months to get a home into escrow, compared with three weeks at the peak of the 2004 selling frenzy. That gives buyers more room to negotiate and removes the pressure to make hasty decisions.
"Buyers no longer have fire in their belly. They're still worrying they're buying in a peak market and will end up losing equity they might have," said North County real estate broker Kris Berg. "There's just an uncertainty about where we're headed, which is causing buyers to sit back and think about it more."
Los Angeles economist Raphael Bostic says buyers now clearly have the edge.
"I think what we've seen is a transition of the market from a pure seller's market to one where the buyer has more leverage than they've had in recent years, so that's a sign we're returning to a saner market," said Bostic, of the University of Southern California's Lusk Center for Real Estate.
"The frenzy was unlikely to go on forever. For 2006, I think we'll see a slower, more measured-performing market."
Reflecting the changed market, sellers are including incentives unheard of months ago, such as higher commissions to agents, decorating and landscaping allowances and an offer to buyers of a "free" car.
The incentive of a $20,000 Nissan by condo-conversion developer Del Mar Heritage helped persuade Omar Faraj, 30, to buy a 1,164-square-foot town house in Escondido for $399,000, his first home.
"I just heard 'buy a condo, get a car' when I looked into it more," the Palomar Hospital pharmacist said. "I do need a car – I have a 1997 Altima – and I'd been thinking about upgrading."
Faraj said he is not worried that prices might dip or stay flat.
"I'm in it for the long term," he said. "I'm not in it for a quick flip."
With the promise of quick profits virtually gone, today's buyers may well have to follow Faraj's lead and stay put longer to earn enough equity to buy a bigger house.
Potentially worrisome is the impact of rising mortgage rates. Rates for benchmark 30-year, fixed-rate loans have remained above 6 percent for three months.
The outlook from economists is for a slight increase in 2006. David Seiders, chief economist for the National Association of Home Builders, expects the average for 30-year, fixed-rate mortgages will rise to about 6.75 percent by the third quarter, while the Mortgage Bankers Association predicts 6.8 percent by the fourth quarter.
Despite the pessimism of some housing analysts, one major forecaster has tempered its earlier opinion that California's real estate market was headed for a downturn. The University of California Los Angeles' Anderson Forecast, which has had a reputation for issuing doomsday predictions, eased its view in its latest report, which foresees a slowdown but no crash.
"Local housing markets will cool off, leading to a slowdown in spending and some job losses in construction and other real estate-related industries," said economist Ryan Ratcliff, who wrote the outlook. "With this in mind, we are currently forecasting a plateau in home prices, a moderate decrease in sales and new building and two years of weak growth. However, this forecast represents the middle of the road."
But Erik Bruvold, a vice president at the San Diego Regional Economic Development Corp., takes a more positive view. He said any hiccup in housing price appreciation may be brief because of a bright job picture, especially for the high-paying high-tech sector.
Looking to 2007, he can conceive of a sizable upturn in prices.
For entry-level buyers, the bright spot in San Diego County's pricey market has been the conversion of apartments into condominiums, a politically charged trend that has helped buoy the new-home market.
More recently, though, a glut of converted condos has slowed sales and has forced converters to offer incentives, while in the city of San Diego, the conversion process may be hung up by legal challenges over environmental issues.
"It's clearly a buyer's market," said Paul Kerr, president of Davlyn Investments, a local condo converter. "What's happened is that the investor buyer is no longer really active in San Diego County. The opportunity to buy a conversion and hold on to it for six months to a year and flip it and make $50,000 to $100,000 – those days are over."
With thousands of high-rise condominium units in development, downtown San Diego is regarded as a housing barometer by many industry watchers.
Real estate analyst Gary London said 2006 will see a "cycle of correction" after an infusion of 5,217 units downtown in the past five years. He says that while prices are flattening and sales are slowing, the long-term demand for downtown housing is secure.
Downtown real estate agent Eric Jones added, "Our speculator buyer is gone, which is good. We're glad to see the market settle down."
As the year begins, many say that a cooler housing market comes as a relief and that they are hopeful the market will find equilibrium. It is actually a good thing that the frenzy driven by price speculation has been removed, many analysts say.
"You should buy a house if you want to live in that house," said Bostic of USC. "If you're buying it for investment purposes, this is a relatively poor time to do that."
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Roger M. Showley: (619) 293-1286; roger.showley@uniontrib.com
Staff writer Martin Stolz contributed to this report. |
