Subprime to have little impact on desirable areas of San Diego??

[Anonymous]

but in a nice area, with well off people – how does the subprime market drops hurt these areas? i don’t see the connection? if the whole street were realtors, loan agents and roofers…maybe the housing slowdown hurts the street…but if you hve a doctor, lawyer, stockbroker, etc… all with good jobs/loans who can ride the storm out… why does their neighborhood go down?

I asked the same question a few weeks ago on another forum. The answer is that it’s not so much the foreclosures in the high end market that are driving the specific market down, but that the price of alternatives is dropping.

Say a buyer is interested in La Jolla, but can only afford a 700 sq. ft. fixer cottage in the village. He then notices that he can now get a 2200 sq. ft. house with a yard and a pool in University City for the same price. (A year ago, he could only get 1700 sq feet and a small yard and that wasn’t good enough for him) This now is possible because the prices in UC have dropped because the prices in Clairemont have dropped because the prices in Mira Mesa have dropped because the prices…. The buyer in question takes his $ to UC, because he finds the extra house, or capacity to find a lower price attractive enough to change markets. Now there’s a decrease in demand for fixers in the village which means that nobody can sell in the village to move to a view home on Mt. Soledad and it continues up the chain… When demand drops, prices for must sell owners (and there will always be a few must sell owners – divorce, estate, employment) will have to drop as well. This takes a while to trickle up, but eventually we should see it.

If this holds true, even the most exclusive properties – for example, Beachfront LJ Shores will be susceptible. If one can buy 2X the house across the street from the beach, he might think that’s a better choice and demand for oceanfront just dropped. As long as the market correction continues long enough for it to reach those high end properties – it should happen. I agree that the extent of the correction may be less than at the bottom because the owners in the high end should be somewhat market savvy or at least be able to afford good advice, but it should still be observable.

[CardiffBaseball]

23109VC are you reading any other blogs? ocrenter’s blog for instance? Ben Jones housingbubbleblog?

[PerryChase]

I think that it’s more a matter of the rate of turnover and the number of transactions rather than expensive vs. less expensive neighborhoods.

Expensive areas have less turnover. They are built-out so they don’t have as many new comers.

In the end it’s going to come down to the relative desirability of the “nice” neighborhoods in relation to the other neighborhoods. They are all connected.

For example, Nordstrom might be able to command 4 times the prices of Target. But if Target drop their prices, Nordstrom will have to eventually drop their prices as well to keep the value/price ratio in balance. That’s despite the fact that Nordstrom customers are well-to-do. Otherwise, Nordstrom will slowly loose market share and go bankrupt.

Actually, if you look at the history of run up, you’ll see that many of the lower priced properties in less desirable areas quadrupled. Expensive coastal properties also quadrupled. But upper middle-class areas such as Carmel Valley and Rancho Bernardo only more than doubled. So, now looking at the downturn, a larger drop in less-expensive neighborhood is just giving back at the same rate of appreciation.

Interesting topic. Great business school project. One could review all the past sales and analyze rates of appreciation and depreciation by price groups.

[sdrealtor]

Most buyers looking in LJ Village arent going to Univesity City regardless of the price. Del Mar or even Solana Beach but not UC. Your theory assumes people dont have firm preferences and the oppositeis tru at the high end. If they cant afford LJ they could end up in South Florida.

[Anonymous]

sdrealtor

Maybe, maybe not… I think the buyer you describe – describes many but surely not close to all. I currently rent LJ Shores, we’ve been looking LJ Village/Birdrock area. We love LJ, but might end up in UC if the value is right – and would even consider North PB if we can convince ourselves to do private schools. I’ve lived in costal Encinitas, and Solana and loved it, but I-5 traffic isn’t worth it to my wife, even from Del Mar or Carmel Valley. At any rate my illustration was more about the mechanism than the neigborhoods….

[sdrealtor]

North PB sounds like its in line with what I mentioned. If you end up in UC it would represent a major compromise form the life you’ve led for what sounds like many years. I’ll believe it when I see it.

[citydweller]

I know of at least one “well off” person who lives in a “nice” area who borrowed against the equity in their home to buy investment property, thinking that the new property would double in value in a few years, just like their first house did. They didn’t mind that the rent they were receiving from the investment property wasn’t anywhere near enough to cover the cost, that would all be recouped when it was sold.

I’m sure there are other well off people who did this, and have been carrying these negative cash flow properties for some time. Who knows how long they carry it before walking away, and how this financial drain will impact the security of their “nice” home.

[Anonymous]

I’ll believe it when I see it.

sdrealtor – you’re probably right – the interest in UC is more my wife’s, and she’s not really spent much time looking around there. Just something she mentioned – (so I thought I’d use it as the illustration) We’ve got friends with young kids who are renting a house with a great backyard in UC after selling in N. PB in 2004. They’re waiting to get back in and are now thinking about UC – and that’s what got my wife mentioning it. She’s not spent much time looking around there though and she REALLY likes the Shores – so I guess I too will believe it when I see it…

Pacific Beach seems ripe to drop in a big way – and I do think that will affect Birdrock/Windansea which will ultimately affect the LJ Village… Only confounding issue is the school boundaries. I went for a run down through PB/Mission last weekend and I couldn’t believe how many for sale signs and open houses I saw. At least 4x more than I’ve ever seen on that route… but that’s another story.

[El Jefe]

Don’t underestimate the poor judgment of the buyers in the “nicer”, i.e. tract hell, areas that a lot of people seem to talk about here. The wife of my partner on a project I am working on was an Admin Asst to a Wells Mtg Broker in Carmel Valley from 2002 till mid 2006. From about 2003-2006 they were processing dozens of $1M+ B paper loans a month, and the 4 other brokers were doing the same. Granted very few were teaser ARM’s, but a HUGE amount of no doc/lo doc stated income stuff. It seems that 90% of the people who bought in Carmel Valley since 2000 are self employed and making $250k/yr… yeah right. If cookie cutter housing is your thing, your time will come.

[El Jefe]

And to all the folks that say that the corrections never hit the nicer communities… I watched the a guy just up the hill from my old house on Cambridge St in Cardiff buy for 800K in 1989, and sell for $625K in 1992. There was a time that there were SCREAMING deals all over that hillside. Little 500 sq/ft beach bungalows sitting on lots that were actually 2-3 parcels, fully dividable, going for $300-$400k in the early 90’s after the last bust.

[asragov]

It is not that the subprime meltdown will hurt nice areas directly.

Lenders are tightening lending standards all across the board (I am working on a $3+ million loan, under 65% LTV, mediocre credit, and it is not easy). This causes “friction” in commerce, and makes it harder for everyone to obtain financing.

You should be aware also that a lot of people with wealth do not have good credit. I know one very wealthy professional family that does not believe in credit cards. They have a hard time borrowing money, so they just pay cash for things.

The classic book on the subject, which helps explain how credit is not wealth, is of course:

The slowdown in the economy, slowdown in credit, and slowdown in rise in asset prices will affect everyone.

You can read many, many articles on how this slowdown is not confined to the subprime sector, including Nouriel Roubini’s excellent website:

http://www.rgemonitor.com/blog/

[Author]

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