San Diego Housing Bubble News and Analysis

Who says that all areas will bottom together? Where are you looking. Places like MM are falling so fast that it is rediculus and fall 09 may be a great time to buy as nothing will happen for the next few years. (maybe not....)
On the other hand CV, 4$, and the costal communities in the North county are a very different animal. These places used 5 year arms and neg ams, and they dont reset till late 09 at the earliest. Give it 6-9 months for the trouble to be observed in NOD's and NOT's and you are looking at fall of 2010 before the real magic begins.
The economy matters, no matter what if the economy is going to hell, the bottom wont be seen. If we are in recession till 2009 all the forecasts and bets you see published are off. If we regain speed in the fall like it is foreseen, then you have a plan that may work out.

Point taken, even within a local area like san diego, real estate is still local, LOL. Just trying to zoom in on a general range.

I plan on buying something about 3 miles from the coast, dont want to pay too much premium. Something like west clairemont, or north park/south park, up to about carmel valley. Kinda in the middle and slightly east of the coast. Somewhere in that band, while avoiding too much air traffic noise.

Its surprisingly difficult. The san diego lay out is really quite a mess LOL

Watch the foreclosure data, because it will foretell the market.
http://www.foreclosureforum.com/stats.html

Remember we are only in year 3 of the correction; last time it took 7 years.

Wow! That was some chart. Did you see the yearly default numbers for 1982? Scary. I mean back in 1982 how many houses were there? Towns didn't exist back then. No SEH, no Carmel Valley, no Foreclosure Ranch, no Del Servitude, no East Lake. Most of La Costa and Carlsbad didn't exist. Back in 1982 downtown was for drug dealers and prostitutes, not high-rises. Yet that number was pretty huge.

Wow! That was some chart. Did you see the yearly default numbers for 1982? Scary. I mean back in 1982 how many houses were there?

The figure I found was about 321,000 housing units in 1980.

Therefore, the rate of foreclosure in 1983 was 321,000 (housing units in SD county in 1980) divided by 4071 ( foreclosures in 1983 from Innovest's site) which yields 1 foreclosure for every 78 housing units.

I chose 1983 instead of 1982 because foreclosures appeared to be a little worse in 1983. Let's compare that to San Diego county today.

The rate of foreclosure is 1,125,827 (housing units in SD county in 2006) divided by 13932 (March 2008's 1161 foreclosures x 12) which yields 1 foreclosure for every 80 housing units.

1 in 78 houses foreclosed on in 1983.
1 in 80 houses foreclosed on in 2008 (projection).

Very similar! And 25 years apart.

svelte - at first I was looking at foreclosures, but I meant defaults in 1982, which makes sense b/c they would certainly turn into foreclosures by '83. We're looking at the same numbers, more or less.

KIM - back then we didn't have the advent of combination teaser rates w/no money down w/no docs w/rampant investors w/co-erced appraisers, etc. etc.

But yes, similar. Some deja-vu going on for sure.

There may be different causes for each downturn (I wasn't here in 1982, I'm not sure what caused that one), but it is interesting to note that we are not yet any worse off foreclosure-wise than in the early 1980s.

Most every hog here in hogville is aware that the complete story on this downturn is not known yet since we are in the midst of it. It could very well be that by the end of 2008 things have gotten worse...we'll see.

As Tom Petty said, every day we get one more card. The waiting is the hardest part.

Every time I look at the chart I'm impressed by numbers. Look at the TOTAL number of defaults in 2004 for the year 4,260.

January 2008, in just one month 3,299. In one month almost the same as in one year!

10,294 total for the year of 2006.

9,795 for just the first 3 months!

If this continues, and nothing to really indicate it won't, this is going to be a brutal year.

I would agree with the posts in this thread... to summarize:

You have to get regional. Different areas will bottom faster then others. In this present cycle I think that we may indeed see a pretty substantial variance. Certain regions are not far from breaking even or providing positive cash flow. That would generally help build a strong base for that region.

The other very good point was regarding the foreclosure rate. On a regional basis you need to see a leveling off for a few months in a row. Keep an eye on the overall inventory for that region to make sure it either keeps constant or better yet starts to decline.

As a side note I am a little bit concerned about the bottom for some of the more desireable markets. I think the bottom may be a year or two farther out then I initially hoped but that is a thought at the moment and nothing more. I think a big factor there will be the second wave of resets for A and Alt A paper.

SD Realtor

I have some questions. We had our peak in the late '80's for whatever spurred it at the time. In the early '90's we had a decline and flatline in real estate until what, mid '90's when Clinton did away w/capital gains and lowered rates. Then prices crept up at a reasonable rate, I'd say, making up for years of negative pricing. Those were the 2 things that were the shot in the arm for real estate, until it leveled out. Up until about what, 2001 when Subprime, Etc. got in motion.

I believe that one should take Subprime out of the mix. What would be normal appreciation were that not a factor? Where would prices be? Better question. If subprime never entered the picture, what would make any appreciation happen? We certainly have reasons to explain why we believe a decline is in order. What would be the impetus for an increase in price?

Graham
I asked in a separate post which area people thought was typical / average and the answer came back: Clairemont.

Would tracking that area in detail be a guide to the trend of the region

OR are we talking of different parts of the region and parts of the city proper which may as well be on different planets as they have so little in common: in which case is it positively misleading to talk of San Diego as a unit at all.

The RE mantra is that RE is local and I concur. Every area is different. So, although using a San Diego wide # might be OK for general chit chat, if you really plan to buy, you'd have to look at how each area is playing out in this down cycle. I even notice a difference in rate of decline for different part of the same zip code. So, I don't think any one area can speak for San Diego as a whole and San Diego as a whole will never speak for every area.

As we've mentioned many times before, the bottom end has been crashing much harder than the rest. My feeling is that it'll hit bottom before the total San Diego # hit bottom. The high end will hit bottom after that. That's just my 2 peso.

Gdcox,
San Diego city? San Diego county? San Diego the city center? San Diego the tourest attractions? There are alot of facets to San Diego, and no one area speaks for them all.
I was neither born nor raised in San Diego. Moved here in May o6. I have lived in Clarimont and Mira Mesa. I can say that the have a very similar make up and similar feel. They have nice areas, and not so nice areas. Were built well before any bubble, and are mostly made up of SFR's with a decient mix of condo's mixed in. You can follow both with relative ease and they march to nearly the same drummer.

Having said that, comparing these to anything on the ocean is like comparing Paris with London. Sure, both are capitol cities and major metroplitan areas. Other than that, you know the difference. Point loma may have been built in the 60's with clairmont, but they are not the same beast. Newer is better, closer to the coast is better, views are a wild card.

I dated a girl from London for a while. The thing that kept blowing her mind was that the UK, all of it, is roughly 2/3 the size of California. There are about 30 million people in CA, what 60+ in the UK? We are so much more spread out than most in London (where she was from) ever understand.

Basic rules of thumb. North is better than South, West is better than East, Newer is better than older, and higher is better than lower. Get a good map of SD, apply that rule of thumb in that order, (maybe blue is good, red is bad) and you will find that the coast is almost all blue, the east all red, and the purple makes a near perfect line from Orange County to Mexico down the middle. That purple are is your average. Anything else is just too small an area to be significant.

2011-12.

2011-12

I'll second that.

If I really, really wanted to buy, late '09 might be a good time to start seriously low-balling and see if you can get any takers.

Shiller: Historical Housing -Bubble: "The clear implication of the chart is that normal prices are around an index value of 110, the value that reigned for nearly fifty years (circa 1950-1997). So if the massive run-up in house prices since 1997 was a bubble and if the bubble has now been popped we should see a massive drop in prices." Robert Shiller,2006

SD is so overbuilt in some places, that the only thing to support the current prices from falling much more would be some fantastic industry that boosts the median household income by 50%.
There is nothing like that in SD. Businesses cannot operate in a place where the housing eats up all the wages.

The previous housing US declines (and Japan) should tell us how long this takes to run its course. It appears this time it's worse. I keep thinking 2011 will be around the bottom but then Japan took 15 years to turn around.

OK. This is the kind of chart that scares the hell out of me. No one addressed the questions I just posted a few back.

I'm contemplating taking the plunge on a coastal property that when all said and done may be at 2001 prices. If it drops a little more, then I'm not too worried. If we're seriously looking at a depression, can we really go negative levels of the '30's?

Coincidence that 77 million Americans born between 1946-1964. Almost justifying the last major incline that sustained itself w/slight ups and downs through the '90's.
If subprime never entered the picture, what would make any appreciation happen? There's more factors that would lead to decline. I'd be thrilled if it just flatlined.

Those 77 million are going to end up selling their places adding to inventory. I find it reasonable to think if one takes out the subprime factor that we could be back to 2001 levels or thereabouts. But if we factor gradual inventory increases over a period of years of the boomers selling, how low can it go? It would be a triple-whammy. Subprime gone, unemployment up, inventory rising.

In the early 80's interest rates were in the the high teens. That is why defaults were so high. I believe interest rates for mortgages will be around 10% in a year. The weak dollar and strong Euro will force rates up. The US with its negative savings rate is dependent on foreign savers that will be going over seas unless rates go up. I believe in 18-24 months mortgage rates will be 12-15% for people with good credit. Foreclosure rates will be much higher than 1983. History does not repeat, it rhymes.

It's impossible to tell right now. My guess 6 months ago was 2010ish. Since 01/07, I've been thinking values will be going back to 2001 levels in most San Diego areas. As a former wholesale AE, I know how much complete garbage is out there. I think the Option ARM product is going to have a much bigger impact than the subprime loans that are out there. The option ARM is what allowed San Diego to reach it's highest average home value. I'd guess that 80-90% of people in those loans have absolutely no ability to make a real payment. My company didn't offer that product but many of the offices I worked with did tons of them. It was almost comical how often borrowers were barely able to afford the minimum payment. Many were looking for something lower than 1% payment. Typically once the borrower found out how the option ARM loan really worked, they wanted out. Once they found out what the payment would be for a real loan, they realized that a real loan wasn't an option. I'd usually get 2 of these scenarios a day and not one ever refi'd out of the option ARM.

I didn't expect the level of govt. intervention that's going on. It's become clear that they are willing to try anything to make this go away. IMO, it is only going prolong the pain. Values have no choice but to go down since the products that fueled the stupid appreciation have been taken away. The level of bailout that ends up happening is definitely an x-factor in this whole mess.

There may be more than a triple whammy. At every point in history when a normal cycle hit bottom, the majority could just sit tight. Now it is not the case. Forget sub-prime, it was rampant in prime. At no time in history has even 20% of the mortgages been adjustable, neg am, teaser, etc. During the bubble in S.D. the number of non traditional mortgages exceeded 80% of new purchase financing in the county. Never before have we seen this dynamic, where time is against people attempting to ride it out. I've never seen anyone release data as specific as I need to illustrate this point, but buyers in 2004,2005,2006 and their percentage of underwater, distress and resetting mortgages with no viable escape and no ability to ride it out, what is their foreclosure rate? I'll bet it breaks 50% for that specific group before we are all done. At no time has the average Southern California been so ill equipped to ride out the bottom, not even close, so anything that happens wont suprise me.

I keep thinking 2011 will be around the bottom but then Japan took 15 years to turn around.

Japan has a cultural trait of honoring debts.

Here, on the other hand, tossing the keys is American as apple pie.

Why anyone things Americans, especially in SoCal, will bend over backwards to service and insane debt when they can either rent or buy the repo down the street for half as much is beyond me.

Double-especially when, thanks to our state law, they don't have to. I would not be surprised at all if we saw 100% failures in the riskiest of RMBS tranches.

Map

You guys seen this?

Large map

35% of loans in San Diego done w/payment options.

I got the maps from seekingalpha.

Someone made this comment. I'm posting it here also b/c it just makes sense:

One LARGE thing your historic price to income graph is missing is interest rates. Here are the average interest rates over the period:

2007 6.3
2006 6.4
2005 5.9
2004 5.8
2003 5.8
2002 6.5
2001 7.0
2000 8.0
1999 7.5
1998 7.0
1997 7.6
1996 7.8
1995 7.9
1994 8.3
1993 7.3
1992 8.4
1991 9.3
1990 10.1
1989 10.3
1988 10.3
1987 10.2
1986 10.2
1985 12.4
1984 13.9
1983 13.2
1982 16
1981 16.6
1980 13.7
1979 11.2
1978 9.6
1977 8.9
1976 8.9
1975 9.1
1974 9.2
1973 8.0
1972 7.4

See those nice low points on your graph? A $100,000 at 6% has a payment of $600 a month. The same loan at 13.8 % in the 1980's? The payment at 13.8% is $1200 or so. At "just" 9% like in 1991 the payment is $800 or 25% more.

So, if you normalize your graph with respect to HOUSE PAYMENTS, not HOUSE PRICES, you will get a MUCH different graph. One that is more appropriate when calculating affordability of housing.

Another comment:

Student debt has tripled since 1991 and given that young educated Americans are the most likely demographic to be "first time buyers" it might be interesting to predict how student debt will lower the immediate pool of first time buyers who are the only demographic who can really help America grow out of the housing crisis.

TG - These loans have been around for a long time. Just the packaging of them together was the problem. I think there were/are first time homebuying loans w/3% down w/FHA, no? Developers used short-term I/O loans. I'm self-employed and the only thing I can do is bring 1099s and bank statements to support my tax docs which after write-offs showed little income. I had to do some kind of no-doc loan, but supported.

The cominbation of the loans together was the problem. That and the lowest rates in 40 years.

I've seen graphs over the past 30 years of home prices relative to employment. It would be interesting to see one relative to interest rates, since that affects the payment so much.

jp I vote that you graph the data you already have re. interest rates... Just stick it in excel, add home value numbers, and voila! Then post it here of course... :)

Thanks for volunteering me. If it weren't for the fact that I'm math stupid and graph dumb, I'd gladly do it.

On the bright side, I can drive a stick. I have some redeeming qualities. I rely on you math wizards for my weakness.

Here's your interest data overlaid with the Case-Schiller graph for the same time period. Sorry, it's very crude and basic.

I drive stick but am neither smart nor sexy nor a woman (as the other thread discusses) yet I still won't go back to automatic. Gosh I hope by stick you mean manual transmission and not some shocking euphemism.

Hmmm - There goes my theory. There doesn't seem to be a direct correlation between low interest rates and high prices in the past, except for now.

Was there a play on words there, driving a stick?

I do drive manual transmission.

Thanks for doing the graph for those challenged in that aspect such as myself.