San Diego Housing Bubble News and Analysis

Usually things slow down into May/June. Homes that listed in Feb/March/April that are still on the market by the end of June then need to seriously think about meaningful reductions. Many of those same sellers hold out until Sept or later then pack it in for next spring if they do not sell. The smarter ones slash and burn and get the homes sold.

Right now I am pretty darn surprised at some of the active/pending ratios in certain desireable areas. As a buyer I am disappointed by the activity and was hoping for poorer results.

SD Realtor

Doesn't matter. We still have foreclosures in the pipeline, we still have an oversupply of listings, and the volume of sales just about can't reverse its trend due to the financing criteria.

What amazes me is how steady the downtrend has been so far. I expected the trend to manifest itself in spasms, not the equivalent of the freefall that we've seen in the last 9 months. I stand by my earlier comments that a -10% adjustment in a price over the course of the year is a pretty fast adjustment. The -15% stuff is mind-boggling. To me, at least.

Let them have their bounce. Foreclosures from the first wave won't peak till the end of this year and it will take another year (maybe longer) just to retreat to where we were in 01/2007.

Hey SD R,
You state that the desirable areas are doing ok, and everyone here wishes for alittle less. Totally agree. I am just wonering how the total spring selling season is. How are the middle and low income areas? I follow MM, clairmt, Pway, and I know there is more activity than 3 months ago, but eh! that is to be expected. What about the other areas of the county? Sales are good overall, or is CV and 4S holding out and everyone else is getting clobbered? Just wondering.

Hi DWCAP, just to clarify I said,

"Right now I am pretty darn surprised at some of the active/pending ratios in certain desireable areas."

I have several clients who are banging heads against the walls because of the increased activity. Mira Mesa is pretty intriguing right now because we see that the REO or short sales that price most aggressively, (in that mid 300's range) are indeed going pretty darn fast. While it is frustrating it will set the stage for a new set of comps which will be good in the long run.

My "GUESS" is that the numbers for April and MAYBE for March will not show the drastic volume (total sales) declines on a yoy basis that we have seen over the past 2 years. I only say that because we may see a glimpse that price declines have finally provided a bit more buying. Combine that with reasonable mortgage rates and a bit of a seasonal bump and again, it wouldn't surprise me if my guess is correct. Now the median may and should still be lower.

Please don't confuse this with me calling a bottom or anything like that. It is just one of those times in the cycle where patience will be needed. Go to the beach or watch some hoops or something like that. Hopefully by July things will be back on track.

Then again, most likely I am all wrong.

SD Realtor

Thanks SD R,
I have written off the YoY anyways. The bubble in subprime popped about 13 months ago now, August will be 1 year pop for everybody. Starting to get to the point where shitty starts to look ok cause last year was also shitty. I just wonered about esmith's "fort vs non-fort" idea and how true it is.
Truth be told, I couldnt give a rats ass about it all now. Kind of a game for me. I do have some sympathy for those of you with kids and a wife dreaming of a house (NOW you cheap jerk). Just not one of you yet. I like that houses in my area were 450k, and now are 350k. It isnt money in the bank, but piece of mind. And besides there are alot more buyers who can buy at 350 than 450. We have to clear the tables of buyers in each step down, and each time the table is bigger and more stable.
I play a little game, watching the market and trying to find the first house in the areas I mentioned that lists AND sells below 300k, and interfamily doesnt count. Itll come in MM, that I am sure. Now itll prob be a house that you should just burn and rebuild, but still. My current guess is September, when the summer is over, the "stimulus" is spent, and the hope is gone. But I know nothing of the games being played in Washington and NY, so they may ruin my little game. It is ok, the bet is ill buy myself a beer and toast the return to affordability, or ill buy myself a beer and drown my sorrows about being wrong again. Either way I end up with a beer and houses that are more affordable. Swweeeet!

DW, you have the right attitude, make a game out of it because that is all that it is. When I buy and leave behind my little internet hobby, I nominate you to pick up my torch and find a way to relate all strategy back to alcohol. Speaking of alcohol, how come none of the financial posts about the falling dollar and gold prices point out the most important part of currency rates, the fact that bordeaux prices are rising, I don't need any gold, but I need my wine.

Bugs, once again, is right. The decline has been steady, be prepared for a little bounce, we are way overdue. It should never have declined so consistently. The next three months should be the busiest time of the year, the bulls haven't had anything to grab onto so expect a big propaganda push coming soon. If it doesn't come and the banks pee on the parade, expect fire and brimstone come October, because there isn't anything more the fed can do, they've fired all their bullets. If you are a seller, get aggresive as hell, it's 1:45 a.m., last call.

In the areas I have been looking in, RSF/Santaluz, I have not seen a lot of new inventory hit in my size/price range this past month, which is surprising. All the homes I have gone after have either sold to other buyers or are holding strong at their asking prices. I wait patiently to see if any of them fall out of escrow or drop their asking price.

I will be listing my own home next month so I will have a perspective of both buyer and seller. Should be fun.

TG- Running with alchol and fire? Can anyone say human molitov cocktail? Ill just write "Countrywide" on my back and call it a political statement. My slogan can be "burning but still going." Maybe Bear Stearns would be better, more timely. :)

And who cares that french wines are getting expensive. You live in arguabley the best wine growing region in the WORLD (CA, not temc.) and despite all their wishing and stupid NORCAL stickers, they use the same skydiving currency you do. Add in all the countries who HAVE to keep exporting good wines at any price since they have near no home market (Chile, Argentina, AUS) and you are sitting pretty. Well, ok you are stitting slovenly with a pokadotted use-to-be white shirt, but still. Expand your mind and your pallet, not your wallet my good man.

No, the real reason I am ok with it all is that I dont mind renting. I dont understand the mentality that renting is only for loosers and the poor. You are perfectly happy shorting the market but dont see the paralells to renting? Same as the idea that no one this side of college should have a roommate (not sharing the same bedroom, but the same house). Why? I have a better place with more stuff for less money? I also have an instant friend to share/use all the cool stuff. I know a bunch of people who have their own places, and they always seem to be out or at my place hanging with us. I dont want to live in a house with 20 other guys again, but I am not a hermet, I like at least SOME people out there. No, in a falling or just not appreciating market, the place to be is renting, waiting to pay you tomorrows inflata-dollar at 5 years ago prices. And while I wait, please fix everything that breaks, let me use all your appliances and fixtures so I dont wear out mine, and take care of my yard for me. All for the sky high price of HALF what it would cost me to buy it.

Speaking of alcohol, how come none of the financial posts about the falling dollar and gold prices point out the most important part of currency rates, the fact that bordeaux prices are rising, I don't need any gold, but I need my wine.

Because that is FAR to painful to talk about. I mean housing is one thing but good wine, thats a building block of a functional life. Might I suggest switching to Italian, stock up on the 01's while you can as those are pretty reasonably priced. Costco (here in SD) has the 01 Paolo Scavino Barolo for 40.

Speaking of Italian I do most of my buying at Wine Exchange in Orange. They have a huge selection and the best pricing in SoCal. Its Disneyland for winos.

Josh

I don't want to see any whining about the price of wine!! I just got back from Florida last week, and the $5 dollar bottles of wines we buy here are $15-20 there. We're really spoiled in California to have such easy access to the best wines in the world right here in our own backyard. One of the managers of a restaurant I ate at in FL said they only get 1 case of Rombauer chardonnay a year and it costs them a fortune. Here, I can pick it up at SDWC pretty much any time, except when they run out of course. ;)

Now if you want French wine for cheap, move to France. It blows me away how cheap the wine is there, but of course with the horrible exchange rate, it's pretty expensive for us Americans to go buy it.

SDR
The Mira Mesa Activity caught me be surprise this week.A client, who I thought was waiting to get out of Mira Mesa, brought up buying a second house there.There are indeed many pendings. I checked sales for the last calendar month and there were only 2 over last year. My guess is that failure rate for escrows will be pretty high or it will take a long time for some of these properties to close. Still,offer activity and pendings are pretty surprising. I checked the surrounding areas, which are all higher priced of course. It looks for the most part like activity matches last year pretty closely or that sales volume will be even lower.

This comparison has brought up a new concept for a possible trend. "Flight to Cheap". This seems to make sense. Geographically, Mira Mesa is much like the other higher priced areas but is on fire by comparison. It is interesting that a year year and a half back. We were discussing "flight to quality" with regards to CV. Which was relatively on fire at the time. Money was still easy to get in large quantities then now it is not.

The "Flight to Cheap" Syndrome may get stronger for several reason. Buyers want to hedge potential losses with modesty(what a concept). Money is tight, probably especially down payment money. It is easier to come up with 10-20% down on 350K than 650K.

Now the question bothering me is... what happens after this hypothetical flight to cheap ? Is Mira Mesa going to find support first and the surrounding areas come down relatively? Is this a false floor and "cheap" ain't "cheap enough yet(even in Mira Mesa)? I am thinking some of both but I am feeling like making predictions gets sightly more dangerous as time and price declines go by.On the other hand I don't want to haphazardly slip into inuendo because of a few sales or pending sales.

Here's my take on Mira Mesa and surrounding areas. In short, I think Mira Mesa experienced the majority of its declines already. We're talking about ~40% off from peak. The question is will we see 45% off peak to trough or 60% and how the remaining 5-15% will play out. We can very well go into a soft landing from here and let inflation eat away the other 5-15%. Right now, mortgage is quite similar to rent, even w/ 0% down. With 20% down, you're well under the rental rate of the area. If the buying demand doesn't die down in 3rd and 4th Q, we might be forming a bottom.

Regarding surrounding areas, like PQ, they didn't rise as much as MM, but they haven't fallen as badly as MM either. Based on rent, mortgage is still well above rental price. So if we see rent as a fundamental that we must return to, then these areas still have much further to fall than MM.

The lending standard and requirement of 10-20% down will force a contraction of price as well, just like how it was 10-15 years ago. The priced difference between 1300 sq-ft house in MM, and 1800 sq-ft house in PQ wasn't that huge, probably around 20%. Right now, the gap is more like 40%. Same with Carmel Valley, in 1998, a 1500 sq-ft house in MM, was around $160k while a 2000 sq-ft house in CV was around $260k, which was a 60% premium. The same 1500 sq-ft house in MM right now have fallen back to around $350k. Add that 60% premium will put the price @ ~$560k. However, they're listing around $700-$750k right now. Even if MM house doesn't fall anymore, CV is still 20-25% away from that 60% premium. Like Rustico said, it's much easier to come up w/ 20% down on a $350k house than $560k house.

Right now, mortgage is quite similar to rent, even w/ 0% down. With 20% down, you're well under the rental rate of the area.

Asianautica, can you give an example of a rental listing & a similar MLS listing to support this ? While I have no doubt that this will become true, I don't think that MiraMesa is there yet.

http://www.sdlookup.com/Property-EFC7096...

So less than a day after I post that I am looking for the first 3/2 in MM to fall below 300k, AND that I didnt think it would be till September I find the above. Now I have not lost yet, cause it didnt List below 300k, it listed at 309900. But wow. I am alot more of a bear than most of the other MM posters on here are, but we are heading into the spring selling season and already comps are hitting sub 300k. It sold for 255k in 2001.

Now dont go thinking that I dont recognize the problems with this place. First off, the area. I wouldnt buy next to Camino Ruiz for anything but Free. Like please take this house, no charge, just pay the property tax. It was a REO, which means that you dont get all the facts necessarly. It is small, and even though it was sub 300k, it is still $260/ft2. It doesnt have a large yard and was built in the early 1970's. It is no jem that ill admit.
However, as per the burn and turn part of my little bet with myself it is a 3/2 SFR under 300k. I may have overestimated the stomach of the banks to take it. Guess MM is gonna be the SD temecula.

Give it 6 months and i am still betting 250k on burners like this. Someone thinks they just got a hell of a deal, I think they just flushed 15%. But hey, they own a house, I dont.

The house DWCAP just posted can probably rent for around $1700/month if it's in livable condition. @ $300k w/ 6% interest rate and 0% down, you're looking @ P+I = $1800/month.

Then there's this one: Linky. @ $335k w/ 6% interest rate and 0% down, you're looking @ P+I = $2000/month. This one more upgraded w/ granite and new cabinets. It can probably rent for around $1800/month. So yes, they're pretty close to each other. If you have great credit, right now, you can probably get around 5% w/ some points. Since you can't get 100% financing anymore, if you put 20% down, your mortgage would be $1440/month for the first house and $1600/month for the 2nd house.

Do you see where I'm going w/ this? By no mean would I buy these houses(personal preference), but it's getting to a point where Realtor can claim it's cheaper to buy than rent (w/out using ARM or exotic loans) and J6pk will believe it.

You may remember that in mid-January average conforming rates dipped below 5.5% and briefly fell as low as 5.2%. Everyone who managed to lock in those rates is rushing to buy right now. Thus a bump in pendings and closings. Not a spring bounce, but rather a low-rate bounce.

Back around Jan 23rd, 10 T-Bill dropped to around 3.28, a few weeks ago, we dipped to 3.28 again and now bounced to 3.50. Rates right now shouldn't be that far off compare to the low of mid January. Which is why I don't think it's the cause for the spike in demand/pending.

http://www.bankrate.com/usergraph/chart_...

Asianautica, thanks for posting the house on 8470 Pallux Way.

With a 20% down payment, the total cost of ownership (mortgage + property tax + insurance - tax deduction) of this house is about the same as renting.

With that said, I think the following is going to occur:

1. Prices will go down a bit more & become attractive for investors to scoop them up.
2. The increase in the rental supply (b/c investors rent these houses out) will result lower rents.

#1 & #2 will repeat in a vicious cycle. I think the early investors will lose money because lower rents effectively create a new "floor" for prices.

The bottom for houses like the one on Pallux Way: $200k - $250k

Thanks for the graph esmith. I guess 30 yr. fixed doesn't follow 10 yr T-Bill to a T huh? Now you're argument makes much more sense.

gn, both of those condition are speculation. All I know is that rent for these house last year were on average about $100/month cheaper and these rental are getting snapped up pretty quickly. So I don't see the rental demand vs supply reversing. I never meant to say that it pencil out as a rental, but it does pencil out as a principal resident for someone who want to buy now. Base on your 20% down, PITI - Tax deduction, I get, about $1300/month (assuming you're in the 37% tax bracket and 1.1% property tax rate). So, where can you rent a 3bed/2bath house in MM for $1300/month? I'd love to know, cuz I'm looking for a 3bed/2bath house to rent in MM right now.

Also, I'd love to know how you come up w/ the $200-250k # as the bottom and which interest rate you use. Since at today's rate, you're talking about P+I = $960-1200/month.

Tax deduction, I get, about $1300/month (assuming you're in the 37% tax bracket and 1.1% property tax rate)

The 37% tax rate is pretty high for the demographic in Mira Mesa, don't you think ?

All I know is that rent for these house last year were on average about $100/month cheaper and these rental are getting snapped up pretty quickly.

This is a temporary situation because: there are all of these houses that are being foreclosed & but have not become rental properties. In other words, the rental supply is artificially low.

I'd love to know how you come up w/ the $200-250k # as the bottom and which interest rate you use. Since at today's rate, you're talking about P+I = $960-1200/month

1. A couple of years from now, rents for these houses would be around $1500 - 1600 (because of the increase in rental supply & the impending recession).

2. There is an old saying: "excessive things correct themselves excessively". Translation: Not only that prices will go down to levels where they are "justified by the fundamentals (i.e. rents)". Just as prices "overshot" on the way up, prices will "overshoot" on the way down.

It seems like buying here(Mira Mesa) now makes sense for people who want to pick up a second third etc. house and they have big cash flow by renting the one they are currently occupying. This should be easy to do for people who bought in the 90's or earlier, they might consider themselves better off by securing current rates and getting the cash flow rolling into the new mortgage instead of letting it stay latent. This may the next generation of successful small time investor/ landlords. They make a lateral move as far as the house quality goes or step up a bit. The risk is pretty good.

The 37% tax rate is pretty high for the demographic in Mira Mesa, don't you think ?

37% might be the high end of MM, but 34% is not. Considering, for 2008, 28% federal = $131,450 and $200,300, you're talking about 2 people making $66k/person. That's not too out of the ordinary.

This is a temporary situation because: there are all of these houses that are being foreclosed & but have not become rental properties. In other words, the rental supply is artificially low.

You're speculating that these "phantom" inventory will become rental. Mira Mesa have no new housing inventory, so I don't see how these "phantom" inventory will affect rental rates. The rest of your argument are speculations as well. I don't see data to support your argument.  To me, it's no better than the "we're running out of land" argument from the perma-bulls.

I kinda think that the next real reduction is that rents will fall as population does. California is already loosing people left and right to other lower cost states. However we had a huge economy going, demanding ever more cheaper and cheaper labor, so internation immigration made up more than the difference. Already crossings at the Mexico/USA border are 20-25% below previous levels. Itll get worse before it gets better. As population falls, demand for rentals falls as well. MM,clairmont, linda vista, poway, National City will take it in the ass as their base demographic disappears to other states. Sure, immigratants will want to move in, but how many are making 100k+ a year to afford a 350k house? Not many, not with a really weird recession striking at strange parts of the economy and growing stronger.
Now about rents. You can start to see small cracks forming.

http://sandiego.craigslist.org/csd/apa/6...
http://sandiego.craigslist.org/csd/apa/6...
http://sandiego.craigslist.org/csd/apa/6...

(strange, just over a year after the subprime fun started and the cracks start to show. How long is a standard lease again?)
These will get snapped up in a second, but itll put the constant drumbeat of rising rents under pressure. Why should I rent your 2/2 for 1450 when I can get similar for 1200? Is it as nice. No, but then again I can actually afford a better life if I pay less. Again why pay 1200 for your 1/1 when they will take 900? Small cracks, but over time cold and water in small cracks will break up any rock.

Also, I think that a small disconnect lies in the definiton of supply and demand. First demand needs to be broken up into general demand, (ie I WANT A HOUSE) and buying demand (ie, I CAN BUY THIS HOUSE). I noticed an estimate that I cant find anymore that says that the requirment of 15-20% plus a 3 month cushon, would remove ~35% of the buyers from the market. Now that was national, but itll be worse in CA, and even worse in a bubble zone like SD.
Second, supply can be artifically high due to the huge rash of foreclosures. MM is already one of the higher areas for foreclosures North of the 52. How much more junk lies in wait? How many people want to stand with their 450k morgage when the house next door is selling for 300k?
I see no reason why areas such as this wont overshoot any basic fundamental to rent or affordablity due to high supply and painfully low demand. This is long term, ie the next 2 years or so. Plus, MM will have to start competing with the slightly nicer areas like PQ and Poway and such as prices inch down there too. Every buyer is precious in a market lacking demand, and itll drag housing lower the same way people traded down to MM because they couldnt afford PQ when prices were rising.
And inflation isnt gonna get us outa this, Wage inflation would, but any recession will take care of that. Rents went up faster then income just like prices did, and theyll have to come back down to fundaments too. It just isnt ANYWHERE near the degree. I say ~15% give +/- 5% due to sevarity of recession.

Also, ok. Say I am totally wrong and this is the bottom of the market. So things get ok, people feel better and banks stop failing. So what happens??? The fed raises rates to combat inflation and all of a sudden rates are up at 6.5-7% again and now what??? Damned if you do, damned if you dont. Prices reductions are the only thing that will fix this, absent huge wage inflation. I vote for wage inflation, but I have a feeling my vote doesnt really count. Damn, just like Florida sans 2000.

Asia, If your looking for a house, 1700 is the bottom of the market, and I wouldnt pay more than 1900 for a 3/2. Good luck man, I dont envy you at all. Not really looking forward to the fall. I just cant imagine that my LL wont want SOMETHING in 3 years. I dont want to pay it, I could, but I am cheap.

Hi Rus -

It is hard to say right now. In July when we can look back and see how the spring really did stack up I think we will have a better picture. The April volume figures are going to be very interesting to see. Again, I don't see any of this activity any more then a nice little spring push and then things will come back to normal.

I absolutely do feel like more modest areas that have run down quick will bottom out quicker. One thing to note though is that these areas also have a larger inventory of REO properties to chew through. I think we are not at the bottom in Mira Mesa but I do think that there seems to be a spot where alot of homes priced in that low to mid 300k range go pretty quick if they are in decent shape. There are some pretty scrappy places thats for sure. The good thing is that hopefully the nicer places that don't sell will start to now come down there.

Lets see the spring numbers on sales volumes. Once we get into a long hot summer hopefully we will see another leg down. It will depend on rates.

SD Realtor

You're speculating that these "phantom" inventory will become rental. Mira Mesa have no new housing inventory, so I don't see how these "phantom" inventory will affect rental rates. The rest of your argument are speculations as well. I don't see data to support your argument.  To me, it's no better than the "we're running out of land" argument from the perma-bulls.

Here's the data from ForeclosureRadar.com :-)  Take a look at the picture. Each one of the bubble is a "distressed property". Note on the lower right hand side: "showing 200 of 457"

MiraMesa

Once again, you're assuming all those will become rental. Do you know if they're completely empty or do they have people living in there? If they do and IF these property does become rental, those same people will be renting those houses. So rental supply goes up but so would demand. The people who are in there right now are not in the rental demand pool. Do you get my point?

During the real estate boom, there were many "pretenders". They come in many stripes:

1. People whose incomes are so low that lenders (under normal circumstances) would not lend them money to buy anything, not even condos. These people ended up as owners of SFH, anyway. They are "renters who pretend to be homeowners".

2. People whose incomes allow them to buy condos/town houses only. These people ended up as owners of SFH, anyway. They are "condos/town house owner who pretend to be SFH homeowners".

3. Then there are those who can afford a small SFH in Mira Mesa. When values go up, they extract equities to buy additional properties or fancy cars or fancy vacations. They are "lower middle class folks who pretend to be able to afford the upper middle class lifestyles."

Now, the data from ForeclosreRadar.com tells me that Mira Mesa has more than its share of "pretenders". These "pretenders" have been living beyond their means, so now it's time to pay the pipers.

Basically, they mortgaged their future, they spent their future earnings. This means that they won't be able to return to their previous standard of living before the bubble. So, they won't even be able to rent in Mira Mesa.

Now, you can say that I'm a speculator if you want. But, there is a truism that transcend time/place: All debts have to be paid :-)

ah - you're assuming that they will rent in Mira Mesa, or even in San Diego - or California for that matter. What if they get a job out of state and relocate. Or move in w/families maybe even midwest or back east. Crazier things are happening.