Everyday, we have walk-ins at our office that express that they think the market will soften some more, and that they are going to wait it out to buy.

Now I cannot predict the future, so I am not sure if this is the bottom, but it surely is not near the top! The only way we will know when we have hit bottom is when the prices are already climbing back up. I can't see the market getting drastically worse. It may go down a little bit more, but should not be enough to stop someone from putting an offer on a property that they like.

I think when the media describes San Diego's market as a whole, it makes it seem much worse that it really is. Downtown San Diego is a completely different market. Real estate consultants are saying that downtown is one of the best areas for long-term investment.

Prices are down nearly 30%, and now is the time to buy in Downtown. Properties are going off the market faster than a few months ago. Already we are seeing multiple offers on properties that are either priced to sell, or are in a highly desirable development. Many times in this situation, the condo sells for above asking price!

So the people who continue to wait out the market for a year or so, may miss out on Downtown's best deals.

-Ashley Souza

By Nathan Moeder, The London Group

November 2005, the peak of the market here in San Diego, seems like a different world ago. Since then everything has been in flat-out turmoil (subprime) or just plain limbo (sidelined buyers and investors). Predicting the precise bottom of the market is nearly impossible – just like trying to buy a stock at the cheapest price.  And we don’t realize we’ve hit bottom until there is hindsight. But here is some interesting data that may suggest stabilization is around the corner (or maybe we’re rounding it now?).

The price-to-income ratio is one metric to determine if the housing market is affordable and sustainable. It’s simple – take the price of the median home and divide it by the median income. For the 1980 to 2000 period this ratio reached a low 4.1 (1985 and 1996). In 1989 it reached a high of 5.7. But the 2000’s yielded much higher ratios, reaching 9.0 in 2006. The reason for this was lower interest rates, new mortgage vehicles, and lax underwriting……..or basically just the ability to finance and how much.

This statistic is now the center of debate of those trying to predict the market. The most common argument is that that the price-to-income ratio must fall back to historical norms (in the 4.0 range) for the market to be in equilibrium.  However, past is not prologue, and just like reading any ancient script, you must consider the context. The context here is leverage. To say that price-to-income ratios will return to the 4.0 level is to suggest that we will be in a high interest rate environment. I agree that is where we are heading, but the interest rates at those price- to-income levels would mean that 30-year mortgages return to the double digits. In the 1980’s the average 30-year mortgage cost you 12.7%. In the 1990’s it was 8.1%, which was a market that was affected more by job loss than the high cost of housing.

The adjacent table depicts the change in leverage between the past 20 years and where we are today. The average interest rate was 10.3% and price-to-income ratio was 4.6 for the 20 year period from 1980 to 2000. However, if we assume that 30-year mortgages will be at 6.5% to 8.5% over the next couple years, consumers can afford to finance 18% to 43% more compared to the prior 20-year period. This translates to a price-to-income ratio of 5.3 to 6.3.

So where are we today? The price-to-income ratio has dropped back to 5.8. In addition, the Case-Shiller index demonstrates that prices have receeded to 2003 or 2002 levels. This information is shown the following chart along with the percentage of income that is spent on housing. Currently, 36% of income is spent on housing, which it hasn’t been since 2000 - 2001. This is also less than the late 1980s and early 1990s period.  But if the price-to-income ratio fell to the 4.0 range, the correlating percentage of income spent on housing would be 25% to 29% - which would be lower than even the lowest point in the past 20 years. 

(click on chart for larger version)

It’s hard to picture that the fundamentals of housing affordability in San Diego could fall to its lowest levels in 20 years. And if it did, we would have more severe economic conditions than just a housing slump, which means that qualified buyers and affordability wouldn't necessarily be the problem. But when the micro-markets of San Diego stabilize it will be at different times, largely due to the concentration of foreclosures. Currently there are already some initial signs of stabilization in some of the coastal neighborhoods in San Diego. I don’t know if we’re there yet, but it might be closer than we think. The next question is: how long will we be there?

From InmanWiki

If you are in the market to buy a home, you have no doubt heard the term "Short Sale". No, this does not refer to sellers who are under 5' tall. A "short sale" is industry jargon for a seller who owes more on the property than what it is worth. The seller in this situation needs the lender to accept a "short" loan payoff, or in other words accept less than the full amount due on the loan. So how does that effect you the buyer?

First of all, short sales require the lender to agree to the reduced pay off. Therefore, when you negotiate on a short sale, you are negotiating with two parties: The seller who owns the property, and the lender who holds the loan. You need the approval of both parties to get your offer accepted. It is important to make sure the seller has received preliminary approval from the lender, because if the lender does not agree to the terms you will have no contract. Therefore, it is important to question the seller and/or the seller's agent to make sure the process is in place, and that the bank will cooperate. This process requires the seller to submit documentation to the lender demonstrating hardship, along with evidence that the market value is less than the outstanding loan.

Secondly, be prepared for a long process. Dealing with banks in a situation like this can sometimes be comparable to getting allergy shots... it can be a long, drawn out, and ultimately aggravating experience. Often, you are dealing with layers of bureaucracy, and this can slow the process down. So short sales usually require patience on the part of buyers. It is also important to have interest rate protection during this process. In a normal transaction, buyers will typically lock in interest rates for 30 to 60 days. That may not be enough time for a short sale, and you want to avoid being 45 or 60 days into the sale only to find out that your rate lock expired, and your interest rate just went up 1/4%. Plan for the worst case. It is good practice to include in the purchase agreement a time frame for lender approval, with a clause that gives the buyer the right to cancel the transaction if the lender does not approve the sale after a certain period of time. This way, as a buyer you are free to pursue other properties if the lender is dragging their feet.

Thirdly, be prepared for potential issues at close of escrow if the owner is still living in the home. Often times, sellers in this situation are angry and frustrated, and on occasion can damage the property, remove appliances, fail to maintain the landscaping, leave the property dirty and full of debris, or take other actions that will cost you money. Be sure to do a walk through prior to close of escrow. Since the seller theoretically has no money, any issues at close typically have to be negotiated with the bank.

Lastly, lenders like to sell properties "as is" in these situations, as they do not want to get into negotiations over property repairs. This is okay, but make sure you as a buyer have the right to inspect the property to your satisfaction, and the ability to cancel the contract if the inspections uncover issues with the property. And if there are issues that come up, you can certainly request that the bank resolve them. They are under no obligation to do so, but if the request is reasonable and it makes business sense for the bank to agree, they usually will.

Short sales can be fairly straightforward, or very complicated. This depends on the stance of the lender. Some banks are much easier to deal with than others when it comes to short sales. As always, you should seek out an experienced, professional real estate agent to help you navigate these waters.

1. How do I get access to preview the house, get it inspected, and let my financier's appraiser in the house before the day of the auction?

Answer: Talk with the lender (or the attorney) who is foreclosing. Also talk with the current owner whose house is up for foreclosure. If you are not able to get access, I would be very reluctant to go forward. Regardless of how good a deal you may get at the foreclosure sale, you don't know the condition of the house. Many homeowners who are about to lose their house will strip it of everything valuable -- fixtures, appliances, etc.

2. How do I go about checking out any tax or mechanic liens on the property?

Answer: Many local jurisdictions have Web sites that will provide you with the tax information. But you should immediately retain an attorney to assist you. The lawyer can obtain a title search to make sure that there are no hidden issues that would preclude you from getting good title to the property.

3. Finally, is this a reasonable way to go to try to buy a personal residence property? I am looking for a condo. The condo prices have risen so high that I thought I could find something reasonable at foreclosure.

Answer: Buying any property at a foreclosure sale is risky. First, at the last minute the delinquent homeowner can file for bankruptcy relief, which would put a stop to the sale. Second, as discussed above, you must know the condition of the property. And third -- and perhaps most important since you are considering buying a condominium -- make sure that you carefully review the financial situation and the legal documents of that condo association. Are there other units that are delinquent or facing foreclosure?

* Benny Kass, Inman News 2/25/08

A condo-market meltdown has put the dream of owning a piece of downtown San Diego within the reach of more Valley residents.

Tightening credit and pain caused by rising payments on subprime loans have put the brakes on new-condo sales, sending prices plummeting and strapped buyers running for the exits.

While still lofty, prices for some units are now more than 30 percent below previous highs and still falling.

A new 725-square-foot "bank-owned" studio, two blocks from the San Diego Padres' ballpark, is listed at $189,900, down from $289,900 at the end of September.

"Prices are at least starting to make sense," said Stanley Paul Cook, a former Phoenix resident who is now a San Diego real-estate consultant.

He noted that real-estate speculation over the past few years pushed average San Diego home prices near $700,000, making it one of the nation's most expensive housing markets.

But the deals probably won't last. Construction of new condos has dramatically slowed, and when the existing units are sold, prices are expected to creep up. After all, it is San Diego, still one of the country's most desirable places to live.

Falling mortgage rates and a possible increase in the size of loans that can be sold to government-backed agencies also could help jump-start the stalled market. And there is increasing interest from foreign buyers who get an additional discount due to the weak dollar.

But for now, terms like "short sale" and "lender-owned" have become the bywords of the real-estate market downtown, along with "desperate" and "make offer."

Lockboxes for real-estate agents cover railings outside buildings. Inside, residents come home to find foreclosure notices on their neighbors' doors.

Tiny 'treasures'

The building boom, spurred by an aggressive downtown redevelopment effort and the construction of the Padres' Petco Park, brought thousands of new condominium units to downtown San Diego in the past few years.

Real-estate speculators fueled the frenzy, flipping (selling, often before taking occupancy) properties from building to building while creating an artificial demand that sent prices through the roof. "The market was so good and prices were going up so fast that we were oblivious to any kind of a peak," said Ken Baer, an agent with Willis Allen Real Estate in San Diego. "We knew things were high but thought they would keep going up."

Unit 211 in Discovery at Cortez Hill, for example, sold in 2002 for $409,000 and in 2004 for $699,000. The unit sold to a Phoenix couple in December for $470,000.

Downtown, there are more than 1,000 condominiums on the market in a roughly 125-block area. That is up from 700 last year and 500 in 2005.

Of the 1,000 units, about 400 are in new buildings that are just being completed.

Most of the others have been built within the past few years, and many, bought by speculators, have never been lived in.

They are generally small. One-bedroom and studio units, some under 500 square feet, make up the largest category of unsold condos on the market.

"An entry-level condo that sold for $400,000 a year ago is practically impossible to sell at that price in this market," said San Diego real- estate agent Mark Mills. As a result, prices are dropping fast for the small condos, and many are landing in foreclosure.

Some frustrated owners, now struggling to sell their properties, blame the developers for building so many small units.

But with the high cost of land and construction, Mills noted the tiny condos were the only way some developers could make their projects make economic sense.

The Centre City Development Corp., a non-profit agency that is spearheading the redevelopment of downtown San Diego, reported that the agency has assisted in the development of 7,200 condominium units in more than 50 projects downtown since 2001.

That has helped push the downtown population to 30,000 from about 10,000 at the start of 2000. Another 60,000 are forecast to move downtown, bringing the population to 90,000 by 2030.

"You can't beat it. Everything is close by," said Gary Smith, a longtime downtown resident and president of the Downtown San Diego Residents Group. "You drive to the golf course on weekends but walk to everything else."

Although new construction has fallen off dramatically, more than 1,300 units are expected to be completed in the next two years. Thousands more have been approved and are waiting to be built.

Converted to hotels

While some condo projects are being abandoned or put on hold, others are being reinvented as hotels, apartment houses and office buildings.

"Before, they were all condominiums," said Sherm Harmer, chairman of the Downtown Residential Marketing Alliance, which promotes downtown housing. "Now, it's a mix."

The Centre City Development Corp. plans to use the lull in condo construction to catch up on infrastructure improvements. That includes the development of 10 new parks, a new public library and waterfront improvements, among other projects.

Upside down

The downtown condo market peaked in late 2006 when sales slowed and prices started to fall.

"Everything went into the crapper the same time I bought this place," Vern Scholl said of his 1,550-square-foot penthouse in the Park Place complex downtown. Scholl paid $1.9 million for the unit in 2006 and had been trying to sell it ever since. He originally asked $2.3 million but was trying to negotiate a short sale for $1.65 million prior to its sale for $1.5 million at a January foreclosure sale.

"What do you do when you owe more than it's worth?" he said.

Lew Breeze, a number cruncher and real-estate agent, estimates that there were 20 foreclosure properties on the market a year ago and now there are more than 100. There are even more short-sale deals.

A short sale occurs when a lender agrees to take a loss on the sale of a property in order to avoid the foreclosure process and the possibility of a greater loss.

Short sales also allow owners to get out from under properties they can't afford without incurring the stigma of foreclosure.

An Aqua Vista penthouse that sold for $2.1 million in 2004 is now on the market as a short sale for $1.2 million.

Turnaround ahead

A slowdown in new construction eventually is expected to lead to a short supply, particularly if a ramp-up in new construction lags behind the falling supply of units.

Baer added that foreign investors, particularly from Canada, are beginning to snap up the units, gaining deeper discounts with the declining value of the dollar.

He believes there is also considerable pent-up demand out there from people who have always wanted to live in San Diego but were put off by the high prices.

While sellers scramble, civic officials remain pragmatic about the situation.

Barbara Kaiser, vice president of real-estate operations for San Diego's Centre City Development Corp., said the city is still processing design review and zoning changes for new residential projects.

"People are positioning themselves for the next boom," Kaiser said.

Max Jarman
The Arizona Republic
Feb. 9, 2008 10:24 PM

In order to prevent a recession, the Federal Open Market Committee lowered its target for the federal funds rate 75 basis points to 3.5%. That is the steepest cut since 1984! To put this in perspective, the federal funds rate is the rate banks charge each other for overnight loans. This essentially affects how much we pay on credit card debt, auto loans, and home equity lines of credit.

The Fed released this statement, "while strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

The Committee expects inflation to moderate, but it is necessary to continue to monitor inflation developments carefully, as "appreciable downside risks to growth remain."

It’s expected that the Fed will cut the rate again at its regularly scheduled meeting Jan. 29-30 by another 50 basis points, to 3%.

Also related, the Board of Governors approved a 75 basis point decrease in the discount rate to 4%. The discount rate is what the Federal Reserve charges banks for short-term loans.

-Ashley Souza

619.546.5479

May 2007: San Diego Housing Market: single family attached and detached homes; The headline is simple, house sales decline further. Sales for May were 2,255, down almost 30% from May 06 and down 43% from May 05. Year-to-date sales of 11,181 are down 16% from the same period last year. We are seeing a progression in declining sales during a time when we should be in the peak selling season this does not bode well for the balance of the year. Pending sales for May totaled 2,616 which is an indicator that June performance will be similar to May. Inventory was 20,904, over 9 months supply.

The supply range for inventory varies by size of home with the lowest being 8 months and the high being 12 months. The supply is up 17% from last year and almost 100% from this time in 2005. Year-to-date listings totaled 34,431 which is inline with last years listing number but up 40% from the same period in 2005. Expired, cancelled and withdrawn listings totaled 17,382 up 224% from last years 7,763 and 525% from 2005. These numbers indicate how many times a home is re-listed before it sells or the sellers give up trying to sell.

The average selling price for May was $650,000 up 4% from last year. There are 3 factors affecting the average price calculation, sales mix by size, mix of detached and attached homes and neighborhood sales (i.e. coastal vs. inland, etc). This month we saw a change in the mix of detached homes rise to 67% from a normal 64%. This may seem small but the average price of a detached home was $745,000 vs. the average for attached at $442,000 so a small change makes a big difference. The over 3100 sq ft homes now make up 9.8%, a 22% increase, of total sales and with an average price at $1,500,000 this skews the average upward. The impact of these two factors appears to be in the 10% range, lowering the average price to $585,000. Remember that the neighborhood mix effect is not calculated here. The important thing to remember here is that depending on the size of the home the change in price varies to as much as a 10% decline year over year with some size ranges having price increases (Note: this does not take into account the neighborhood effect)

The San Diego market continues to be in accelerating decline and I am not sure where the leveling off point will be. The continuing problems of more restrictive lending practices and affordability are keeping buyers out of the market in large numbers. If sellers want to sell they must be aware of the pricing of their size home and neighborhood and price accordingly or they will linger on the market for long periods of time. Buyers need to be aware of the same factors and practice due diligence when buying to get the best buy.