On The House
To hear investment advisor Peter Schiff talking economics, you might confuse him with an end-of-times prophet, delivering a sermon on San Diego’s slumping home sales and subprime woes. As president and chief global strategist of Euro Pacific Capital, he’s got a long track record of being right, which makes his apocalyptic vision of the future all the more unsettling.

"We’re really in for a very prolonged period of pain," Schiff predicts. "The economy that a lot of people have enjoyed has been a function of the perception of wealth from real estate. Real estate prices are going to fall to levels before the bubble started to inflate... you’re basically going to wipe out all the home equity of almost everybody who lives in San Diego, which will leave many people with negative net worth."

Commence the tearing of clothes and gnashing of teeth. As San Diego’s collective anxiety rises — possibly the only thing in our region enjoying an upward trend — Schiff is just one of many weighing in to answer what’s on most of our minds: how far will real estate prices fall, and when will the hurting stop?

Financial advisor Rich Toscano, of Pacific Capital Associates, has been tracking the boom and bust of San Diego’s housing bubble for four years, offering up hard-boiled analysis on his Web site www.piggington.com.

Now that chunks of falling sky have knocked out the critics who called him "chicken little," what does Toscano see in our cards?

"People look at the correction so far and say ‘wow, things have been horrible, it’s got to be almost over’, but from a valuation perspective, we’re still not there yet. If you look at how long housing downturns have lasted in the past, they’ve been in the five to six year range. If historical precedent applies, we’re just half way through."

Alan Gin, an economist at USD, is a shade more optimistic. "The market is still high," he says. "It’s possible that we might see a bottom in the second half of this year but even if we do, it’s not likely that it’s going to turn up again until 2009."

Hardest hit by the downturn has been the low-end market — homes valued less than $420,873 — where subprime mortgages flourished. It’s economics 101: supply and demand. Foreclosures have flooded the market, driving down prices 28.6 percent from their peak, and they continue to plummet. In other words: Chula Vista’s running a blue-light special.

But for others above that line, things aren’t so bad. "The coastal markets, with higher-end inventory, seem to be minimally impacted so far," says real estate economist Gary London, president of The London Group. "There are always exceptions to that, but essentially what we’re seeing at the coast and in the coastal regions is a fairly sturdy supply of housing that doesn’t seem to be showing much valuation decline, and there seems to be fairly strong demand even in this cycle."

Good news for many zip codes in San Diego County. But Toscano says it’s smart to stay a little cautious in light of that. "The subprime mortgages tended to reset quickest, but there are resets lurking out there amongst the high-end areas...they tended to have a longer fuse. If people start foreclosing there, that could kick the cycle off."

If you are one of the numbers waiting on the sidelines, wondering if now is the best time to buy, the consensus seems to be "wait."

"I think there will be a buying opportunity probably early in 2009," says Gin, "the combination of lower prices and interest rates will be very attractive." It’s also good to know that as the market sinks, some positive outcomes may float to the surface.

"It is a possibility that this will make it more affordable for people here," Gin says. "That will help out in terms of the economy overall in the long term, because it will allow more people to live here and that will help us in terms of attracting workers and businesses." Toscano is also optimistic. "To me, it’s an overwhelmingly good thing for the long-term health and prosperity of San Diego. Instead of just selling houses to each other, we’re building for a real economy that isn’t based on a big, speculative, pyramid scheme.

London too, is confident we’ll pull through. "I’m optimistic over the long term," he says, "The good news is that we’re probably right at that moment in time where we’re seeing the worst." We’ll keep our fingers crossed.
— Paul Stuart