San Diego Housing Bubble News and Analysis

Nor_LA-Temcu-SD-Guy

Yep, that's a puzzle alright ...

How many here can afford (or I should say want to buy) a 700K or 800K tract home ????

Not me for one.

People are still in denial and still spending like a drunken sailor.

I was at the Fashion Valley mall last night and it was packed. There was a 30 minute wait at the Cheesecake factory.

I think what you are seeing is the bottom half of the market in San Diego and much of Southern California basically becoming an unmitigated disaster. The top half of the market not as much. I like reading this blog for the regular updates from the resident SDRealtors and how the more desirable areas are performing. This housing correction is different than any other housing correction in California primarily due to it not stemming from a recession. This downturn stemmed from a credit bubble, a really really big credit bubble. That's what makes it so interesting, we have no historical context to gauge where this thing is going and how each segment of the market will perform.

The thing that has been lacking in this correction is a profound shift in psychology. People in the top half of the market obviously don't see the inherent risk in the market so they keep paying those prices. I think we are at a point right now where the market is becoming so bad and the news so prevalent that we actually crack through denial in all segments. People understand "Record High Foreclosures in California". That's not confusing. We are now entering a phase where Mr Sunny Happy Face Realtor (no offense to any realtors on this board) can no longer hide and spin the disaster that is unfolding right now. I would like to see how the top half of the market will perform once we get through this inevitable shift in psychology. I would also like to add that I don't think that California will escape recession which would take this market to the next level in the correction.

Alex there are submarkets that indeed have depreciated substantially already. Many of the suburban and low end areas are well off 2004 prices. It has not happened at the pace that many desire but in real estate time the drop has been fairly dramatic. The problem is that the desireable areas have not dropped as fast as many would like for a variety of reasons that we have discussed over and over again. The bottom line is that the demand is still there. We regularly see posts from the potential buyers (who have the courage) to post here. As long as there is gainful employment I think they will be out there. If the high paying jobs go, those buyers will dry up.

SD Realtor

Most people are not affected by what is going on, other than their net worth dropping.
Their house is still worth 2x-10x what they paid for it, and they never sucked their equity out.
They need a place to live, and don't view their home as an ATM.

The % of the population that is in over their head is relatively small, but those that are losing their homes are getting the majority of the attention.

I think that there is another group of people who aren't concerned today and think that they have plenty of equity and aren't concerned about their ARM because it isn't adjusting until 2008 or 2009. They will be added to the statistics at a later date.

They may not find out that they have no options until it's too late.

In a bubble market of any product, when the bubble bursts, the prices at the peak have no bearing on where/when the market will stop falling. Silver peaked at $50 and dropped to $6 or $7. NASDAQ was 5,000 and dropped to 1300.
Gold dropped over 50% from the peak as well.

If 70%-80% just watch their home values rise and fall, they still have a place to live. Most people don't day trade their houses.

It is impossible to pick tops or bottoms in any market, but markets rarely collapse quickly when they hit a top nor do they bounce quickly at the bottom.

There is still plenty of downside to the local property market, but probably only 10% of homes will be trading owners. These will get 90% of the attention.

When the market does finally hit "the bottom" I think that it will be flat for a long while. There will be no rush to jump in as it still won't pencil out to buy as rentals with any cash flow. Many people will be burned and have bad credit as a result, and unable/unwilling to buy again.

For those that are waiting to get in, I think that there is still at least 2 to 3 years before the bottom, but it will remain cheaper to rent than to buy for a very, very long time. Save up for the down payment and keep your credit score up!

Based on my research of the past week or so, its because banks are just sitting on all their repo's. Possibly hoping for a recovery.

When they unload its going to crater the market.

I think it all depends what you are watching. I pay attention to central SD.

I the last 6 months

Dowtown- inventory seems to have doubled and roughly 20% of all re-sale condos are selling at a loss.

Hillcrest -where I live, prices seems to be hanging tough but inventory has skyrockeded with condos which is 2/3s of the market. People are starting to crack and sell under market value. Probably about 15 months supply+ and climbing on market.

Kensington/normal hieghts/north park/southpark-there used to be only 3-4 sfrs under 400K now there are at least 30-40 and climbing.

Combine all that with all the REOs that have popped up. Seems to be 1 in 10 are bank owned.

To me it is imploding...

I think what you are seeing is the bottom half of the market in San Diego and much of Southern California basically becoming an unmitigated disaster. The top half of the market not as much.

On the way up, it was subprime & Alt-A loans that enable entry level buyers to bid up the prices of low-end houses. This enabled "move-up" buyers to bid up the prices of more expensive houses.

Now, the opposite is happening. The restrictions of sub-prime loans prevented entry level buyers to enter the market. This causes trouble in the low-end of the market first (we are currently seeing this).

Eventually, the effect will ripple up to the more expensive areas. In real estate, everything is connected.

eccen in esc

picture a row of dominoes falling in really really slow motion.

Valley Center - homes sold so far this month - 12
homes on market there - over 200

it's happening - it's just hard to see - wait a few months - wow!

So we know that a recession is coming. It would be foolhardy to buy before then.

HLS, the people who aren't selling because they are fine are not the ones keeping the prices high. It's the sellers who are still asking high prices. And they still have some willing buyers, but not as many.

Questions are:

1) How many sellers are must-sell? Can they are afford to hang on and how long? I think that most can hang on for another year but not much longer. Empty houses cost a heck of a lot in holding costs.

2) When will must-sell sellers give up and lower prices. They can't lower prices now because they have no equity or not enough equity. They will walk rather than bring money to escrow. Lenders hate short sales because that only encourages more (news travels fast). Wait for foreclosures to see lower prices.

3) When will buyers stop paying the high prices?
a) When lenders stop offering 100% financing and require substantial downpayments.
b) When teaser rate loans that make initial payments "affordable" disappear.
c) When interest rates go up.
d) When underwriting get stricter and require full doc.
f) When qualifying for a loan means qualifying under the fully amortized monthly payments.
g) When interest-only loans are reserved for the most credit worthy.
h) When the recession hits.

Those are already in the process.

I believe that we'll have facts on the ground to answer those questions in the fall of 2008. Be a little patient Alex_angel. The price "increases" you're seeing right now is all subterfuge for the carnage (decreases) to follow. It's all a mind game. May be best win.

Here is one data point: I live in Torrey Hills. Right across the street from Torrey Hills elementary, so this is quite a desirable little neighborhood. I rent in a development in which the houses are all quite similar, so one transaction is not too dissimilar to another. A fair number of recent transactions: Around 2005, sales around $800K. Late 2006, low 700's. Now one guy has a house on the market for about one month, and has gotten one offer at the low of his range, $640K. Now, he declined the offer, but still, there is a fundamental decline in value going on.

The sad thing is many are good, earnest people, families with little kids. These ain't no ghetto HELOC abusers.

In any falling market, there are always buyers who buy ONLY because it is cheaper now than it was. They are afraid of missing out.

When NASDAQ dropped from 5000, there were buyers and sellers all the way down to 1300.
Some individual stocks dropped 95% or more.
Some people forget OR don't know the pain.
There are only 2 emotions in any market, which are FEAR & GREED.

Every market cycle brings a new group of people who have never experienced a cycle before.

Those who survived the 1930's depression had a different perspective for the rest of their lives than any generation that came afterwards. It comes with experience.

Many people today didn't experience the 1990's correction of real estate. This is their first cycle.

Builders build. Lenders lend.
If regulations required a 10% down payment, there never would have been a bubble.

There are billions of dollars available. There is an unlimited desire for above market returns. The demand and availability of money won't ever stop.

There are hundreds of millions of dollars being withheld from paychecks that are invested in retirement funds and pension plans.
These funds are fueling the stock market by people who don't understand the risks that they are taking, The EXACT same risks that people didn't understand when they were inflating the housing bubble.

It is a greater fool theory and legaliazed pyramid scheme, that will make some people rich and others poor.
People are in a trance looking at their statements, not realizing that paper profits disappear. Home equity disappears too, but many refuse to accept that.

As long as people blindly do what they are told is the "right thing to do" there will be potential to get rich for all.
The problem arises when a reality check kicks in, after irrational exuberance has taken place.

IF there is a stock market crash, which is possible at some point, the government will step in afterwards and spend hundreds of millions of dollars funding committees and waste 5 years to determine what caused it.

It's what they are doing right now with the mortgage mess.

Completely common sense lending requiring down payments probably won't happen. As long as there is willing exposure to risk, based on a higher return, insanity will reign.

Underwriting guidelines have already changed, based on government guidelines that should have been in place all the was along.

I'm in the lending industry. I deal with this every day.

I think we still have a lot of buyers who cannot wait for the market to implode and keep buying houses no matter what price they are at. This is one of the main factors that either push the price higher or steady.

The other reason is the lenders who are holding a lot of the REOs or other types of non-performing assets in order to maintain a high price market. I hope to see the lenders implode first and then the market will really cool down.

Actually, A_A, what is your definition of 'imploding'?

I agree with PerryChase that we are, at the very least, a year away from an implosion by any definition.

Be patient, save up, improve your credit score and (most importantly) make sure you have a stable source of income, if you need it. SD county is way over-dependent on the RE-RE-RE's (real estate, retail and related industries).

Demand is what is keeping the prices of properties in SD from declining (much).
Overall SD county supply is steady ~ 20k. There is no panic selling.
Because there is no recession currently, foreclosed homes are finding eager buyers.
There are property markets that are basket cases - Florida for example. A lot of people on this site wish SD market was like FL so they can buy at 50% discount. Not gonna' happen in SD though.

scruffydog,

Do you have any reply to this ?

http://piggington.com/mortgage_monster_0

Overall SD county supply is steady ~ 20k

Why is the supply currently at ~20k when it was ~5k 2-3  years ago ?

It's because the speculators who bought 2-3  years ago are now selling. Back then, they used Wallstreet's money to buy. This is why prices went up. Now, they are selling.

It's unraveling. It takes time. Slowly, but surely, prices will come down :-)

Fearful, you mention that "one guy has a house on the market for about one month, and has gotten one offer at the low of his range, $640K."

Does that mean the seller turned down an offer that was within his range (which seems unreasonable, even if it was on the low end), or was the offer actually below his range?

I laways wonder when I see ranges if they are accurate, or a marketing ploy.

I'm sorry, but ScruffyDog, you can't be for real right???
Did you not learn your lesson the last time made a stupid comment like that? It took a matter minutes for your post to be refuted with facts.

Mr Toscano, are you sure that you aren't ScruffyDog and just posting to get us riled up or something???

I agree with Perry if he is saying it is not demand that is keeping prices up. Demand is pretty, broadly speaking,weak especially relative to inventory and foreclosure activity. Demand could increase to change the course of falling housing values, but the odds of that happening seem worse everyday. I wonder what is going to happen to the stuff that has already fallen 20%-30% after the full market starts getting slammed price wise, if it does.

Answering the original question....

The San Diego house market is imploding. Period.

It may be hard to see it because of all the attempts at obfuscation by our friends in the REIC.

But don't worry, the market in San Diego is no different than anywhere else in this country where prices were driven up by loony lending standards. Don't believe for a second that it isn't.

Let the implosion continue...

Fact is the fact, ScruffyDog, the lenders are really holding on the REOs and they have a limit. There are buyers out there for sure, but buyers that are still blindfolded by the message like "SD market was like FL so they can buy at 50% discount. Not gonna' happen in SD though" will regret. Let us sit tight and watch this game. The meat is not here yet.

Keep buying houses scruffy... They never go down you're going to make a killing!

I will tell you what is keeping home prices too high....

ILLIQUIDITY! EQUITY MARGINS! SIZE OF ASSET TO PORTFOLIO!

Houses are not stocks, they can't be dumped on a moments notice. People aren't going to dump houses until they have to. A typical investment in stock has 0-50% in margin. A lot of homes (especially ones that NEED to sell) have 100% in margin (the amount owed vs. the potential selling price).

This coupled with the Days on Market lies (Games played with days on market for a home), create a large number of sellers who would like to sell, but buyers not stepping up to the plate. There are also a large number of buyers who are not willing to sell, because they hope for better times.

As it takes longer and longer to sell a home, and as prices stay stagnant, the market will stay stagnant. As prices fall and economic data gets worse, prices will continually come down and there should be a change in the mindset of sellers. Unfortunately this will make the buyers even more frightened and they will demand even lower prices.

It seems to me that this stagnation is just a lull, prices will come down much more in the fall, and then might have little rebounds along the way. With the true data being as bad as it is (inability to compare apples to oranges, lies about actual selling price (because lots of costs have shifted but aren't shown in the actual price), and more egregious data games by the NAR, it isn't surprising that we keep hearing conflicting viewpoints.

Just like the war in Iraq (over 6 years), we keep hearing politicized viewpoints, we don't get any real data, we hear so many conflicting points that it is difficult to get a handle on the outcome.... (I'm not saying this for political reasons! Just an analogy!) Same stuff in real estate. The Realtors control most of the media messages (completely controlled it until 6 months ago), the data is impossible to get accurate, and only blogs like this really have a discourse on what the future holds (but none of us have a crystal ball).

Anyone see what happened to Countrywide yesterday / today? They think that even by 09 it won't get better (just like the war, they will keep calling the end until it's 2015!)

I think what we are seeing is that volume has very little to do with price. I would have thought with this large of a volume drop, prices would have come down much more. This is part of the reason why I have shifted my view to a more moderate decline opinion. Volume also does not correlate to stock prices, even though many people mistakenly write about that relationship.

It will be interesting to see what the common correlations are between this decline and the 90's decline, when it is all said and done, because there are already significant differences, especially in the lack of median movement.

I do not think we are going to see a crash, just a slow downward movement for a couple more years. We could not ask for much more than what we have had in terms of negative news for a drop, yet the bottom has not fallen out.

As it is with trading, you have to watch how prices react to news, and forget about your opinion about what should happen. The facts are that all of this bad news has not moved prices down much, so that is what matters, not what should happen. Maybe that is what should happen. An upwardly biased asset like a house should go down small amounts on bad news, because it is not an even playing field. Lack of downward price movement on negative news in assets is bullish bigger picture.

That still does not address the affordibilty issue.

Maybe when it is all said an done Southern Californians will decide they need to pay a much larger portion of their incomes, historically speaking, towards there mortgage.

However, that can not be good for the long term financial health of the people.

The Realtors control most of the media messages (completely controlled it until 6 months ago), the data is impossible to get accurate

Also, the data is tricky to interpret. For example, the median price.

The median price reflects what buyers spent on their purchases. Prices have gone down quite a bit, but that's not reflected in the median price. That's because buyers did not spend less, the spend the same & getting more house for their money.

The real estate industry understand this. But they conveniently chose not to mention it, letting people think that prices haven't gone down.

This is one of the biggest myths in real estate. If I get a dollar every time I hear people saying: The median price is holding up, everything is OK, I would be very rich.

On the affordability (or lack thereof) issue in San Diego, it makes sense to me that real estate would have to drop in cost and I'd REALLY like to believe it. But aren't places like San Fransisco and New York examples that demonstrate that the cost of a house can rise well above of typical affordability and just stay there? Why is San Diego immune from that?

Arraya,

It's no fun eating peanut butter sandwiches every night for dinner in your new house. I think one of the things we have to keep in context here is that as SD Realtor pointed out prices are in the process of falling. The Case Shiller index is a much more accurate measure of this and it shows prices are actually falling from the peak. In some cases they are falling as fast as they can in RE. The affordability issue is not going to go away. Without lax lending these home prices can't work. Even if we are at full employment the entry level and move up buyer still cannot afford those homes. We don't have an underlying recession, yet. So basically we have a bunch of homes for sale that employed people can't buy with today's ever tightening credit. The people that own homes and did not HELOC themselves to death don't have to move because they still have a job. The primary pricing pressure is at the bottom of the market due to foreclosures. What we are seeing is the resulting drop in sales volume. And that is where the true danger lies. The lower the volume the harder it is on the local economy for everyone. The best thing that could happen to San Diego's economy right now is if home sellers adjusted their home prices to the prevailing wage and credit realities. That ain't going to happen and we are going full sail into a recession as a result IMO.

I do not SD is immune to that but to what degree?

I agree on the San Fran, NYC argument. Something gets ingrained in the pysche of specific areas which causes them to pay perverted prices for there homes and a larger portion of their income for the mtg payments.

Also, I think that should lead to a detailed analysis of the economics of the individual areas. I don't think median income is all it's cracked up to be as in median home price.

I've been to SF/NYC on mulitple occasions and it just feels like there is a lot more money than SD not just the 15-20% more median income. Don't have specifics but if memeory serves it was no that much more than SD... But I could be wrong...

From what I heard from people who are from there, prices in bay area are 2X the SD prices. That is, a townhouse in a Mira Mesa type of area is 700K-800K. A single family tract house in CV type of area is 1.5M to 2M.