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Is San Diego’s Real Estate Facing Stormy Weather?
With the subprime mortgage lending collapse still unfolding, the real estate market is bracing for a correction, if not a rupture of the national property value bubble. In San Diego, where the bubble has swelled to drive rampant development and investment, the market has only begun to feel the negative effects. Local realtors disagree about the investment bargains expected foreclosures will bring, but advise that the predictions of doom should pass by San Diego much like the weather.
While local home values should take less of a hit than the national average, realtor John Lefferdink predicts that the downturn won’t hit bottom until next summer. He sees some benefit to what he believes is an inevitable ebb tide. Referring to the subprime fallout as a "cleansing of the market," he says, "The majority of the people who are going to get into trouble will be in the next year." As subprime lenders declare bankruptcy and banks foreclose on homeowners with untenable loans, the ripple effect on property values should have little lasting effect on those braced to weather the correction. But Lefferdink cautions against snapping up investments right away. "I’d wait a year. There’s no big mystery to when the market turns. When the inventory starts going down every month, then you know it’s turned, but it hasn’t started happening yet."
As for whether high-end homeowners will be hurt, Lefferdink is less certain, adding, "Everything trickles up, or trickles down. A guy who can’t sell his $700,000 house isn’t going to buy the $900,000 house; and the guy who can’t sell his $900,000 house isn’t going for the $1.2 million house. That’s why the market has slowed down."
Realtor Jason Barry of Barry Estates hasn’t seen any signs of a slowdown in his Rancho Santa Fe territory, but the values of the priciest market in the nation are well insulated from the uncertainty plaguing entry-level buyers. "We have witnessed stability, but there’s been significantly more wealthy buyers over the $10-million mark looking than ever before." Barry doubts this trend will suffer in the coming year, but doesn’t see a disconnect between the highs and lows of the market. Moreover, he disputes the notion of a year of doldrums. "Ultimately, we don’t know, but I don’t believe it will take another year. If you look back a year ago, that’s exactly what they were saying about now. The inventory hasn’t shot up dramatically at all, and the number of sales hasn’t decreased dramatically, either. The demand is still high, but there is a lot of caution in the buyers out there, today."
The subprime lending debacle had a tremendous effect on the market on its upswing, driving up prices as real estate was bought up with shaky loans made on stated income. While reckless speculators face a grim fate, those harmed, as Lefferdink sees it, will be "honest people who got stuck in a loan they had to get. They’re responsible, they have a job, they make their payments on time, but due to characteristics of their loans, they can’t refinance, and their home is devalued. I’d like to see somebody step in, so they don’t lose their house, and we can give people a chance to hold on until the market turns." While he hopes the government will reform lending regulations and help negotiate programs to keep embattled homeowners from getting foreclosed, he also hopes there won’t be a repeat of the infamous Savings & Loan bailout of the 1980s. "If those guys were stupid enough to make 105 percent loans on stated income and inflated appraisals, then they should go out of business."
While Lefferdink advises investors to wait, he says he’s never seen a better market for buyers looking for a home. "I’ve got a lot of money I could invest in single-family properties, but I don’t feel the timing is right. But if I wanted to buy a piece of property and live in it, I couldn’t pick a better time. Even if the market will go down another five or six percent, if you’re living in it the next five years, it won’t matter. In a year, you’ll still have great interest rates and good prices, but the best property will be gone." Barry counters with his own strategy, explaining, "The sophisticated investors are taking advantage of the sentiment in the market to negotiate deals, while everyone else is sitting on the sidelines."
New home starts were down four percent last month, heralding another symptom of a lasting stagnation in the market, but as many realtors say, the recent boom in new housing has been like a forest fire that had to eventually run out of fuel. "We were in a Disneyland market; you couldn’t keep that up. But the big change is, a lot of these developers aren’t building product until they have buyers.
On the whole, Lefferdink sees the dark forecasts as a necessary evil. "The longer it takes the market to turn around, and the more adjusting takes place, the better it’ll be for everyone. The longer it’s bad, the longer it’ll be good, and things were good for so long, and things got so silly with the prices, you knew it had to end. Three-quarters of a million for an 1,800-square-foot house in Encinitas? It’s a joke."
For high-end realtors, the good times, however, are only bound to get better. Whatever the rest of the nation is doing, local real estate means not just land and house, but pieces of San Diego. Say Betty, "I know there’s a lot of worry out there, but the areas here are still highly desirable. You see the amenities, the weather, and the lifestyle, and that’s why people come here." — Cody Goodfellow
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