San Diego Housing Bubble News and Analysis

For years, people claimed that because San Diego was such a desirable place to live, local real estate was immune to price declines. We know how that turned out. Yet these days that same argument is often applied to San Diego's more upscale areas.

It seems, at first blush, to hold up. High-end San Diego homes have certainly weathered the housing bust far better than their lower-priced counterparts. This can be seen in last week's Case-Shiller home price graphs, which show that the high end of the housing market has fallen in price less than half as much as the low end. And the Case-Shiller high tier -- which aggregates price movements of the most expensive one-third of San Diego homes -- understates some notable resilience in swankier sub-markets such as Point Loma, Mission Hills, La Jolla, and much of the North County Coastal region.

The relative strength in these areas has led to the widespread conclusion that the high-end markets are desirable enough to be more or less invulnerable to the housing bust.

I am skeptical of this interpretation.

read more at voiceofsandiego.org

The California Employment Development Department's employment estimates for February indicate that San Diego job growth has essentially flattened out. The sectors that thrived during the housing boom are now suffering through the bust, and while employment is growing outside of the housing boom industries, it is doing so barely enough to offset the housing-related losses.

read more at voiceofsandiego.org

Have a gander at some of the nonsense that flowed from a recent gathering of real estate agents and their friends, as reported by the North County Times.

The last portion of the conference, a question-and-answer session, admonished the media for depressing consumer confidence by focusing on only the negative aspects of housing data...

George Chamberlin, a panelist at the event and columnist for the North County Times, said that some news reporters biased their reports because they are jealous of homeowners.

Most real estate agents who spoke at the conference seemed to agree, with one agent suggesting that agents and builders pull all advertising from newspapers until positive articles are printed.

It appears that the desperate and completely discredited gambit of blaming the media for the housing downturn is still with us.

Let's go over this one more time.

read more at voiceofsandiego.org

Last month I noted that despite local data points and expert opinions pointing to a slowdown in the retail industry, the California Employment Development Department reported that retail industry employment was growing at a fairly healthy pace. To explain this disparity, I offered the hypothesis that the "birth-death model," a statistical adjustment applied by the EDD in order to model the number of new businesses coming into existence, was overestimating the number of jobs being created by new businesses. (The prior article goes into vastly more detail, for those interested).

Today, the EDD released the January job data as well as revisions to the 2007 numbers. The revised numbers indicate that job growth in the retail sector -- and overall, for that matter -- was indeed quite a bit lower than the EDD had previously estimated.

read more at voiceofsandiego.org

Jon Lansner, proprietor of the excellent Orange County Register real estate blog, pointed me at an alternate source of local job data after reading my recent article questioning the accuracy of the monthly BLS/EDD employment statistics.

Like the monthly job report described in the latest article (the Current Employment Statistics or CES), this other data is also put together by the Bureau of Labor Statistics (BLS). It is called the Quarterly County Employment and Wages (QCEW) report and a whole slew of information on it can be found here.

As the name would imply, the QCEW report is released quarterly instead of CES's monthly release. The bigger difference is in the time lag, though: whereas the CES reports on the most recent month's employment, the QCEW reports on the calendar quarter that ended just over 6 months prior. This lag would explain why it doesn't get a lot of press -- people want to know what's happening now, not what was happening half a year ago.

The QCEW has one big advantage, however, and that is accuracy.

read more at voiceofsandiego.org

Howdy all -- over at voiceofsandiego.org I've got a brief look at the last month's resale price data. The January data rodeo will be up here later this week.

In the prior foreclosure writeup, I opined that the high rate of December foreclosures was deceiving because it likely represented a period of catch-up from November's abnormally low levels.

I guess I was wrong, because January foreclosure activity came in even higher. During the month, 3,299 default notices and 1,461 trustee sale notices were delivered to delinquent borrowers.

read more at voiceofsandiego.org

A couple of readers responded to my prior article about the study on local mortgage resets to ask how the projected 2008 resets stacked up against those of 2007. The study's primary author, Joseph Galascione, consulted the archives for me and pulled out some stats on the number of high-risk resets expected each month as compared to the same month in 2007: January and February of 2008 looked pretty much unchanged from a year prior, March increased by 2 percent, April by 5 percent, May by 3 percent, and June by 5.5 percent.

All in all, first-half 2008 high-risk resets will run higher than a year earlier, but only very mildly, with the increase skewed towards the later months. According to the foreclosure study's proposed timeline, then, we can expect reset-driven foreclosures to be slightly higher in late 2008 than they were in late 2007.

read more at voiceofsandiego.org

I got a chance to chat with Joseph Galascione, the real estate broker who was mentioned in the San Diego Daily Transcript a couple weeks back as having authored what appeared to be an interesting study on local foreclosures.

It turns out that the study in question is freely available at the website of Galascione's brokerage, ERA® Metro Realty, and that it is very informative after all.

Galascione and his colleagues analyzed county deeds of trust to see how many San Diego home mortgages were going to reset between January and June of 2008. For each of these mortgages, they determined the likely increase or decrease in mortgage payment upon reset. They also calculated the loan-to-value ratio (LTV) at purchase time, this just being the amount of the loan (or loans) on a home divided by the home's value when the loan was taken out.

Those loans for which the payment was expected to increase by $500 or more and the LTV was greater than 80 percent were categorized as being at "high risk for foreclosure."

read more at voiceofsandiego.org

Yesterday it was announced that Congress and the White House had come to an agreement on an economic stimulus package that would raise the limit for conforming home loans, those backed by government-sponsored loan securitizers Fannie Mae and Freddie Mac, from the current $417,000 to about $730,000 in the most expensive states (of which we are obviously one).

Why does this matter? Because the rates on conforming mortgages tend to be quite a bit lower than those on loans above $417,000, also known as jumbo loans. Right now jumbo loans typically carry rates more than 1 percent higher than their conforming counterparts.

And why are conforming rates lower? Because lenders think that Fannie's and Freddie's debt will be guaranteed by the government.

read more at voiceofsandiego.org

San Diego had another pretty good month for job growth, according to data released last week by the California Employment Development Department.

Unfortunately, you may not want to believe the numbers.

Let's see what they have to say, first.

read more at voiceofsandiego.org

Back in November 2006, I wrote a long-ish piece about credit default swaps. These financial instruments, known for short as CDSs, basically function as insurance policies against borrowers defaulting on loans. In (very) brief, the premise of the article was that some CDS issuers, which we can think of as insurers, probably didn't have enough money to cover the losses once homeowners started defaulting en masse. Once this came to light, I wrote at the time, it could cause a tightening of credit for San Diego's leverage-happy homebuying public.

I never really followed up because the credit tightening ended up being triggered by problems with a different type of credit derivative, the collateralized debt obligation.

The Union-Tribune's latest monthly housing data wrapup features a parade of industry types saying that now is the time to buy. A few of them acknowledge the inventory glut, but not a single one happens to note that homes are still far too expensive in comparison to rents and incomes.

This continued overvaluation is the root of the problem with our local housing market, and now that home prices are no longer being artificially supported by speculative enthusiasm and overly loose lending, there's little reason to expect them to stop falling until they are back in line with the fundamentals. Yet it would seem that we have people lining up to tell the public that it's a great time to buy a home.

Moving on, let's take a look at something else being ignored by the housing cheerleaders: the continued sky-high foreclosure rate.

read more at voiceofsandiego.org

Kelly Bennett's 2007 housing market wrapup quotes local housing analyst Peter Dennehy as saying that "a lot of people believe that this will be the year that the elusive bottom is reached." Mr. Dennehy is surely correct -- many people believe the bottom of the housing market is close at hand. But are they right to do so?

It's true that prices have taken a protracted hit. According to the Case-Shiller Home Price Index, San Diego prices have in aggregate been falling for about two years now and, as of October, had fallen 13.3 percent from their late-2005 peak.

But this decline, steep as it may seem, must be viewed in the context of the enormous speculative bubble that preceeded it.

read more at voiceofsandiego.org

Thought the mortgage meltdown was just a sub-prime affair? Think again. There's another time bomb waiting to explode, experts say: risky loans made to people with good credit.

Believe it or not, above quote is not lifted from the pages of the Nerd's Eye View, despite my longstanding tendency to rant to that very effect. It comes from none other than the Los Angeles Times, in a very good article on the looming foreclosure risks posed by option ARM loans.

A more traditional mortgage requires the borrower to pay a certain amount of principal (the amount owed) in addition to some interest each month. An option ARM, in contrast, allows a borrower to make a monthly payment so small that it covers no interest and only a portion of the principal. The interest and principal that the borrower did not pay is then tacked on to the balance of the loan. Eventually, when the loan balance grows larger than a specified amount, such as 115 percent of its original size, the required payment adjusts sharply upward.

These loans were very popular here in San Diego during the late-stage housing boom. The small monthly payments allowed buyers to get into nicer homes than they could have otherwise afforded, and people by and large seemed to assume that the growth to the loan balance would be more than offset by the expected perpetual rise in home prices.

Now, between the recent home price declines and the tendency for these loans to increase in size, many option ARM borrowers are probably underwater.

read more at voiceofsandiego.org