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That would only prolong the inevitable.

We need to look at this in terms of cause and effect. The prices are out of whack here as result of investor activity and outright speculation. The low interest rates and the lack of reasonable underwriting for the credit was just an enabler.

One of my kids had an MTV show on the other day about kids getting married. Among other thing’s it showed an engaged couple of 19/20 signing escrow papers for their first house (they live in Missouri). My son was shocked to see it, and he didn’t believe me when I told him the sale price on that house might only be $60,000. Needless to say, I looked like a freaking genius to him when the camera zoomed in on the bottom line of $56,000.

My point on this is that if the current pricing were even primarily about the interest rate and the lack of underwriting then this house in Missouri (wherein these borrowers have equal access to these credit terms) would be double or triple in price. But it isn’t, and the main reason it isn’t is because that town hasn’t had investor-mania.

Lowering interest rates won’t bring back the investors because they don’t care about long term interest rates. They only care about short term flips. Without the masses clamoring to get in at any price lest their chance be gone forever, the interest rates don’t mean anything.

The only people who would benefit from lower interest rates are those mortgagees who have ARMS and who also still have enough equity to refinance into those lower interest rates. I don’t think there are enough people in that category to reverse the current market psychology, even if our economy could afford the downsides to reducing interest rates.

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We are almost halfway to the 25% mark (off peak prices) in many of these local market segments, and it’s only been 18 months. If you look at the last downturn, the rate of decline actually picked up during the latter half of the downturn. If that holds true 2007 could possibly be just as bad or worse than 2006, and that includes the offsetting effects of a mini-rally this spring, if it occurs. A 25% net loss off of peak pricing goes far beyond any definition of the “new paradigm”, the “soft landing” or even the “new normal” that the permabulls have been trying to sell us for the last few years.

This downcycle will either reverse this spring (and I can see no reason why it would do that), or it will go into an even steeper decline.

Personally, I think it could end up being a 40% or greater decline in value between price decreases and inflation. If one believes in the return-to-trendline and a subsequent overcorrection it could be as much as 60%.

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The demographics of the boomers may turn out to be of benefit to San Diego’s economy and it may bolster prices here.

Some of the money propping up pricing here is money that was earned elsewhere, including retirement money earned back east and inherited wealth from the generation that actually saved.

As boomers across the nation retire, some of them might wind up with enough money to realize their dream of retiring in San Diego. If so, these people would be unaffected by local wages.

As a percentage I wouldn’t think very many boomers nationwide would fall into this category, but by sheer numbers it might just be enough to be of influence on local pricing, at least for some areas and price ranges.

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During the last bust, Fairbanks Ranch was like this. It was a psuedo Rancho Santa Fe and had not yet reached maturity. Fairbanks got nailed during the last downturn, but I think it’ll do a lot better this time around.

Same for Santaluz this time. It isn’t yet built out or stabilized and it’s a little farther out than some of its competitors so I think it’ll suffer more as a result. The fact that a good portion of it consists of tract homes rather than real customs is also going to work against it.

You’ll know they’re in real trouble when they discontinue the guard service.

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When the number of active listings drops from 17,000+ by 65%.

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Those loans aren’t THAT rare. There are a lot of borrower who are subject to those terms but who don’t realize it. It’s like the credit card companies that have the right to jack up the interest rate on your CC if you fall behind with one of your other creditors.

It’s extremely unlikely that a lender would foreclose on a property just because the borrower is upside down. Some of those borrowers will soldier on anyway. The lenders truly don’t want to be in the business of owning and selling RE assets. They’ll only foreclose if they think they have no other recourse for getting paid. The process of foreclosure itself costs them a lot of money, as does the maintenance and marketing.

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Unless, of course the NAR economists are right and the worst is behind us. Heck, we may be poised for another 5 year run resulting in average prices of $1,000,000 in this region.

It could happen. Just like Haley-Bopp might come around again and take us with it.

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The losses probably won’t be quite as bad as the inland areas but they’ll still be significant.

The outlying areas (relative to the employment centers) will do worse overall. The closer areas will do a little less worse. Coastal areas may actually end up somewhere between the two.

Bressi Ranch (Carlsbad) is already booking 10%+ losses, and they’re only 3 miles from the coast. I saw a breachfront property lose 10% in a single year. I wouldn’t say these markets are immune at all.

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The program prominently features Russ Valone and Alan Nevin as speakers. That pretty much sums up it’s credibility right there.

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Some of the FDIC lenders have a lot of subprime loans on their books. Washington Mutual, just as an example. It’s already cutting into their viability. Lots of people are speculating they have become buyout bait.

Even those lenders with conventional loans have some exposure to an RE market in significant decline. Their borrowers tend to be stronger, but few borrowers are completely isolated from the effects of an extreme RE downturn. No matter what, a borrower can get sick, a spouse can pass on, a divorce can occur; and when something like that happens and the borrower finds they owe more than the current value problems can ensue.

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In terms of utility and for rental purposes, the so-called “Huffman” buildings built during the late-’60s and ’70s throughout the North Park and other mid-cities areas were the ultimate. Ray Huffman had the plan and a lot of imitators, and those properties made good rentals, even if their designs were a little boring.

The properties built during the 80’s tried to provide designs that were more consistent in appeal with the single family homes in those areas, bt in the process they drove up costs. Some of those properties were built to “condo specs” and a certain percentage of them even recorded condo maps when they were built. Converting these properties to condo ownership is a no-brainer. Doing the same with many of the older properties that were built specifically for rental occupancy is less intelligent. Espcially the 1-bedroom units.

Flipping the individual units was an okay plan back when the market was increasing. But because these conversions are less desireable overall it should have come as no surprise that they were the first part of the market to feel the effects of shrinking demand. They’ll be back, but not before the better appeal alternatives have recovered enough to make these lesser-appeal alternatives viable.

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1. According to public records, a single lender did the both loans (first and second) in 2005.

2. As an appraiser I’m in no position to express an opinion of value on a property without going through the routine. A casual search of public records in this immediate neighborhood reveal several sales transactions:

05/2006, a reportedly similar sized model sold for $2,000,000+

02/2006, another similar sized model sold for $1,600,000-

05/2006, a smaller model (~4000 SqFt) sold for $1,600,000+

03/2006, a similar sized model sold for $1,300,000

As you can see, these sales are mostly in the $1,600,000+ ranges, although there is the one sale located right around the corner that sold for a lot less. At least a couple of these properties back to the edges of the mesa and have unobstructed view amenities; and additional upgrades and landscaping after purchase are very common in the area.

Bear in mind that no sales are recorded in this 3-block neighborhood since 05/2006 – although there are few listings. That doesn’t bode well.

If I recall correctly (big “if”), this site is not one that backs to the canyon, so it would normally sell for less than a similar unit with the additional privacy and view amenity. The last time I was looking at sales data in the neighborhood I think the view sites were selling for about $150k-200k extra from the developer, although that premium may not hold up in the resale market.

This seller cannot afford to wait too long for a sale. I wouldn’t anticipate them hanging onto it for even 6 months. If they don’t get some action on it soon they might be compelled to make additional cuts to the list price.

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One of my extended family members has an undergraduate degree from Harvard (but not an MBA). It hasn’t done a thing for him.

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Regarding Blackstone’s purchases, I’m not familiar with the details of those properties so I couldn’t comment on that. However, I will say this: A lot of Japanese money got lost here in California during the last RE market downturn because they misread the long term trends and vastly underestimated how high vacancies can go. I think the same thing can happen this time.

When a purchase is based on an income from a building that only barely covers debt service at the peak of the market, then what’s going to happen if the biggest tenant goes BK as a result of not being able to sell enough homes? Further, what happens to rental rates when the vacancies exceed 25%? You can bet that’s not going to result in a soft landing.

The so-called NNN investors are some of the same people who were flipping tract homes in new subdivisions. They have both the same mentality and the same lack of understanding of how markets can fluctuate. Same stupidity, except they’re working with commercial brokers (who absolutely should know better) rather than residential brokers.

Almost half of the “better” jobs created during the last 5 years are related to an industry (RE) that is getting hammered. I guarantee that’s going to have an effect locally on the businesses that were selling non-essential goods and services to all those people. That will trickle down to the RE those businesses are in, too.

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According to the listing the later sale involved an interior remodel with a nice kitchen and baths, and some landscaping. The interior pics look a lot nicer.

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