2011 San Diego California Real Estate Market

The holiday bells are beginning to quiet down and the new year has arrived. Looking through the San Diego real estate headlines I’m seeing a rehash of some of the past headlines.

Do these sound familiar to you:
* Act now, or you may be paying thousands more in a few months.
* What a great time to buy with low interest rates and a good supply of homes for sale,
* Solid signs of a firming market,
* With interest rates near all-time lows, buying now is a no-brainer,
* Get in now, before the huge pent-up demand for homes hits,

We have heard these same phrases since 2005. The major difference was that in 2005 and 2006 many of the Gurus were adding phrases:
* It’s only a normal pull-back,
* It’s known as a ‘pause to refresh’,
* This is a once in a lifetime buying opportunity before the market resumes it’s double digit yearly appreciation.

Amazingly in San Diego, California, is the local media talking-heads still go back to the same industry spokespeople to get their 60 second optimistic new year outlook for the 6:00PM news.

Naturally, I’d like to join this optimistic, self-promoting crowd, but sorry, I have to tell it like I see it.

After the $ 8,000, Federal and California home buyer credits expired, the local San Diego real estate market entered into a double-dip continued erosion of home values.

After the homebuyer credits concluded, San Diego home values saw modest price appreciation. Now even this modest appreciation has disappeared. Even more troubling is that the resale home sales volume has been dropping at double digit rates for the last few months. Just from April to May the western states sales dropped a reported 20.9%. Huge double-digit declines in home sales are a major red flag that cannot be ignored.

When will the government learn that you cannot artificially create lasting demand? (Statistics show the vast majority of government housing programs, costing billions, are outright failures and have only prolonged our malaise.) I believe the best thing the government can do is to stay out of the housing market and let the open market clean up the mess.

Think about this: Bernanke initially spent almost $ 2 trillion to drive long-term interest rates down.

The $ 600 billion QE2 has no effect to date. Actually, interest rates have moved up substantially. There are a few months left, but I am sure Bernanke will use the “it would have been much worse” argument and declare success. The reality is that there will be no QE3, not with Ron Paul now as the watchdog of the Fed.

Our aging population, combined with a decreased standard of living can’t equate to housing starts comparable to prior generations. I think our government’s relentless destruction of the middle class is making this different from prior real estate cycles.

Foreclosure moratoriums are beginning to expire. I believe the banks will push to clean up their portfolios through increased foreclosures.

Except for cash buyers, home pricing is derived from the affordability of the monthly payment. Should interest rates and taxes go up (a good bet), the purchase price will have to come down to establish a market.

Construction labor is already about as cheap as you can get it and inflation for materials is already present. This spells very bad news for homebuilders.

As far as pent-up buyer demand goes, the gurus again have it backwards. It’s not buyer pent-up demand, but seller pent-up demand to unload their homes.

The depth and longevity of this San Diego housing value depression has been imbedded into the consciousness of the usual first wave of home buyers in their late 20’s and early 30’s. The high cost of living in San Diego has been further stressed with continued multiple raises in utilities, increased state taxes/fees, higher education costs and $ 3.00+ per gallon gas prices. This all equates to over-priced homes in the current world of qualifying for a home mortgage.

I just believe there are major problems with our economy at play that we have never seen before and that will have a deciding call on what happens with housing. I see demand based on finance rather than population at this point.

During the mid 2000’s, almost the entire mortgage universe had been refinanced. This included many baby boomers that were in the last half of the 30-year mortgage they took out when they purchased their home. Some of this was hopefully to pay down other expenses and not to maintain their fantasy of the luxury lifestyle. The refinancing bubble that resulted from the irresponsible actions of Greenspan reset the 30-year mortgage clock. All borrowers looked at, was how the refinance lowered their house payment by $ X per month, without giving a second thought to the fact that they have also extended the term to a new 30-year loan.

Another round of refinancing occurred when Bernanke pushed rates down to the 4% range. The only borrowers left who have not refinanced are those with no equity and/or are facing foreclosure.

In either case, now many Boomers who are reaching the traditional retirement age, find themselves strapped with 20+ years left on their refinanced mortgages. Instead of preparing for the mortgage burning party that their parents had when that generation retired, they are wondering how they can make house payments on a lower income during retirement.
Since this is the first year of the boomers reaching 65, it is going to be a negative drag on housing for years to come.

For the San Diego and California real estate market we have to contend with our own Cap & Tax laws going into effect in 2011 that will increase utility costs by 20% over the next five and speeding up the loss of manufacturing jobs. We also have a new, old governor who was against proposition 13 which sets a maximum cap on property taxes and will likely propose new massive state taxes to deal with a $ 25.4 billion budget deficit.

So as the tune of Auld Lang Syne fades away, let me wrap this up with my opinion that there won’t be any strong base building in San Diego real estate until 2012. I could be wrong and there will be a tremendous growth in appreciation starting this month or in the coming Spring, but based on my 2005 article where I predicted this lousy housing bust, I wouldn’t exactly bet against me.

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San Diego 2012 Real Estate Forecast

Where does the San Diego real estate market seem to be headed for 2012? Once again at this time of year, when all the pundits come out with their forecast, it’s the rare individual that does not go along with the real estate industry’s proverbial ‘now’s the time to buy’ mantra. I’m going to be part of the 1% who deviates from the traditional ‘by now before you’re priced out of the market’ end of the year talking points.

I bet you have an idea where I’m going with my report for the Outlook for San Diego real estate values in 2012. Before I get into the meat of my forecast, let’s take a quick look back at the titles of my prior forecasts for the real estate market and short synopsis of each:

2005 – – San Diego Real Estate — A Trend to Go National? (The big divergence between home sales and home prices seen here in San Diego indicated a dropping market and a real estate trend I thought would go national.)

2006 — San Diego Home Sales Figures: Not All That They Seem on the (industry and news reports indicated that San Diego home value drops were substantially less than what was occurring in the real marketplace. This was mainly caused by failure to consider all the concessions that developers as well as private sellers were offering to entice buyers to purchase San Diego homes.)

2007 — Is Your San Diego Home Appraisal Really Accurate? (This focused on the fact that many appraisers were overvaluing San Diego homes because they were not fully considering seller concessions that were taking place in the open market.)

2008 — San Diego Real Estate Market: What Did You Expect? (How the main-stream media still did not raise any real estate red flags in late 2005. Instead it was ‘just a return to normal’ or “a great time to buy without the pressure of multiple offers.”)

2009 — California: Land of Sunshine and a Year of FREE Living (How many California underwater homeowners were living mortgage and tax payment free for a year or more before foreclosure)

2010 — San Diego Real Estate 2010 Forecast: The Year of the Strategic Mortgage Default (For 2010, San Diego housing will remain a risky deal that will again be dominated by government intervention. Until both the Federal and State governments get out of the housing market, a real bottom will not occur, thus San Diego housing values will continue to decline well into the next year.)

2011 — San Diego Real Estate 2011 – Year of the Short Sale: I personally do not see any real base building in the San Diego real estate market until 2012.

Now let’s look at 2012 for San Diego home values. Back in the summer of ’05, one of the main factors for my calling a market drop was the drop in sales activity while home values continued to increase basically because of the lag time in reporting. Well, I believe the same could be occurring now, except in reverse! With sales increasing (hopefully this trend will stay in place) I believe the San Diego real estate market will finally see home values stabilize in 2012.

I’m not calling for some slingshot snapback in home values next year. I’m calling for, to be precise, the continued modest decline in San Diego resale home prices through at least the first half of 2012. Naturally, barring some major detrimental economic news either here or in Europe, I think the second half of 2012 could see some solid base building, with perhaps, some modest single-digit appreciation by year’s end.

There continues to be talk about pent-up buyers to getting into the market. The theory goes that many potential first-time buyers and move up buyers have been holding off getting into the market and once they see some improvement will rush back in a big way. I said this in a number of prior posts, and I’ll say it again now: I believe there is pent-up demand in today’s San Diego real estate market! The ‘you can never go wrong buying real estate’ crowd has this pent-up demand theory 180° backwards! Personally, I see it not as pent-up demand to buy, but just the reverse! Yes, pent-up demand to sell! I’ve seen many current San Diego homeowners who have seen their home values drop 30% or more during the last six years who would love to recapture a small amount of that decline. They could then move on to a home more suitable for their current family and economic situation. When we finally do see some modest San Diego home value appreciation, I believe we’ll see a lot more inventory become available from these San Diego homeowners.

I usually end these forecast by saying that I hope I’m wrong and things turn out better for San Diego homeowners that I’m forecasting. I’d like San Diego home prices to make a sharp upswing in 2012, but with the magnitude and longevity of San Diego’s real estate home value bust, I don’t really believe that there is NO chance for such a fairytale snapback.

Read more of Bob’s ‘tell it like it is’ real estate opinions & subscribe to his free blog feed at: San Diego real estate market blog  – San Diego real estate agents Bob Schwartz is a San Diego California real estate broker, CRS w/30 Years of real estate experience!

San Diego Real Estate 2010 Forecast: – The Year of the Strategic Mortgage Default

It would be easy to write a 2010 real estate forecast by repeating the industry line that “the new year will mark a turnaround for real estate values; those who act fast will be able to get the best buys.” Real world facts, at least in San Diego, seem to indicate otherwise.

San Diego’s real estate market will most likely have another down-turn in the year 2010, and there are many rationalities why. Remember, many of the adjustable home loans were designed with five and seven year interest adjustments. Many home loans are set to correct next year since the San Diego real estate market boomed in the summer of 2005. The saving grace is that interest rates are near all-time lows and interest rate shock will not be a tough factor. The downbeat with these mortgage adjustments will be the ‘reality check’ factor. How many homeowners will suddenly wake up to the fact that their home is now worth tens of thousands of dollars less than their mortgage balance? Only the naive will believe that their San Diego home’s value will click back soon.

The Northwestern University of Chicago has found that as many as one in four defaults may have been strategic. Driving this phenomenon is the rising number of households that are deeply “under water,” owing much more than the current value of their homes. First American CoreLogic, a real-estate information company, estimates that 5.3 million U.S. households have mortgage balances at least 20% higher than their homes’ value, and 2.2 million of those households are at least 50% under water. The problem is most deep in Arizona, California, Florida, Michigan and Nevada.

So, whether or not you think the San Diego real estate market has bottomed, the reality is, it will take numerous years to recoup equity losses many have endured. 2010 may go down as the year of the strategic mortgage default because of this homeowner awakening.

Talking-heads who claim the U.S. housing market has “bottomed,” or even that it will “bottom” in 2010, don’t have the slightest grasp of fundamental economics. Government and the vast majority of media are using the old tactic of trying to talk us out of this downturn. Any bit of positive new is over-emphasized while the terrible, realistic conditions are hardly noted.

The government has spent trillions of dollars and has not made ca significant impact on the problem. Government saved Wall Street banks, at least for now. Will government platitudes actually turn around our economy? The administration thinks so. They are closing their eyes and wishing really, really hard that it does.They also should remember to click their ruby-red heels three times to insure success.

The best parallel to our current situation continues to be the Great Depression. In 1930, we had a 50% stock rally and abundant “green shoots” before the market turned down in a relentless decline. This time the government intervention is much larger, but so too, is the credit bubble.
Many agree the real unemployment rate is 17.5%. How can the housing market improve until unemployment dramatically improves?

Property values only go up if there is an increase in demand. That is NOT happening. The birth rate of the US is just enough to sustain our population, nothing more, and it would be negative without immigration.
Another major factor affecting San Diego real estate demand, is that the severity of our current home value decline seems to have broken the back of the myth that you could not lose money purchasing residential property in San Diego or California. Until the devastation to San Diego home values, fades from the collective consciousness, demand for housing will be a fraction of what it was.

Those who invest in real estate and expect values to appreciate need to face the fact that by mid-2010 there is a high probability we will be in a rising interest rate environment, which will boost costs on mortgage loans substantially. We all know it is now much more difficult to qualify for a mortgage even with some of the lowest interest rates in history. What will happen when interest rates move up? Will the government again step in with some type of subsidized interest rate/qualifying program (much like the sub-prime debacle)?

On 10-1-08 I published: #1 EZ Fix to The U.S. Housing Market (http://www.brokerforyou.com/brokerforyou/1-ez-fix-to-the-us-housing-market.html)where I suggested an easy way to stabilize the real estate market. My idea was for the government to grant investors who buy and hold homes for at least three years, but no more than seven years, 100% exemption on any capital gain they may realize. Well, perhaps because this was a low cost idea involving ‘investors’ it never gained any traction. But, I still believe it would be a sure-fire fix to our housing doldrums.

Here in California the largest state tax rate just passed; there is talk of additional state tax increases. That, coupled with our already high electric, water and gasoline taxes, portends California homeowners’ disposal income is headed for oblivion! Further combination with the administration’s new health care costs and Cap & Trade’s dramatic impact on utility costs, only the hope & change commissars will be able to afford California detached homes. The California masses will be, out of necessity, forced to live in huge apartment complexes. The California standard of living will take a huge hit, but look on the bright side … mass apartment complexes will reduce commuting, contain urban sprawl and cut down on carbon emissions! Perhaps, most importantly, the extra taxes will insure the California public workers pension plans will continue to provide lottery-sized benefits into the foreseeable future.

Higher rates to support currencies will intensify deflation. Intensifying levels of bankruptcy and foreclosure due to salary decreases and job loss will intensify deflation. A century of inflation is coming unwound in a decade.

In an academic paper titled, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” written by Brent White, a law school professor at the University of Arizona argues that those who are underwater in their loans should just leave.

By leaving, it could potentially save them thousands and it won’t be long until they recuperate financially. Defaulting “strategically” can entice more walk-always by buying all the major items they may need in the near future, such as a car or even a house, right before they take a hike. As long as you stay current with other mortgage lenders, one could potentially have a good credit standing in 2 years after the walk-away.

In my 7-27-09 post titled: San San Diego Homes – WHEN IT PAYS TO LET THEM FORECLOSE!(http://www.brokerforyou.com/brokerforyou/san-diego-homes-when-it-pays-to-let-them-foreclose.html) I noted that: In the Northwestern University study, among those without moral reservations, 63% of those homeowners with a negative equity of $ 300,000 or more would let the property go into foreclosure.

In my 9-22-09 post titled: Foreclosures – Strategic Defaults Double (http://www.brokerforyou.com/brokerforyou/foreclosures-strategic-defaults-double.html) I noted that: Strategic defaults … financially it’s a logical, legal, defensive decision to make. Why throw good money after bad? No more property maintenance, taxes, insurance, etc. With rent prices falling and rental vacancies rising, it makes perfect sense to bail out and have more disposable income at the end of the month. Survival is the name of the game.

So, based on the strategic default statistics and Professor White’s ideas, there is a good likelihood that 2010 could go down as the year of the strategic mortgage default.

While the highly distressed markets like San Diego, will continue to be pressured by foreclosures and myriad other headwinds. The smaller more conservative metros will benefit from the incredibly low inventory levels and should start to see a rebound in new construction activity in the coming year.

All real estate markets are local. I agree with the National Association of Realtors on this particular area. Therefore, I can only venture an opinion on the San Diego California residential real estate market. For 2010, San Diego housing will remain a risky deal that will again be dominated by government intervention. Until both the Federal and State governments get out of the housing market, a real bottom will not occur, thus San Diego housing values will continue to decline well into the next year. The low end of the San Diego housing market is the one exception to my forecast. The low end properties have demonstrated a base building through the second half of 2009. I expect this favorable trend to continue into 2010.

There are many elements that affect San Diego real estate values. I have ended my opinions for years now for the following year’s San Diego housing outlook with this statement: “I hope the market proves me wrong and that my forecast ends up totally off-base.” With that said, however, I’m a realist; and I personally would not bet against my 2010 outlook.

Read more of Bob’s ‘tell it like it is’ real estate opinions & subscribe to his free RSS feed at: San Diego real estate market blog  Also visit San Diego real estate agent   and San Diego real estate agents Bob Schwartz is a San Diego California real estate broker, CRS w/30 Years of real estate experience and an good guy.