We look at how the economy is affecting San Diego homeowners.
June 11, 2012 1:10 p.m.
Dr. Michael Lea, Director, The Corky McMillin Center for Real Estate, SDSU School of Business Administration
Matt Battiata, Broker and CEO, The Battiata Real Estate Group, author of "Upside Down Nation: The Handbook for Upside Down Homeowners"
(In the interest of full disclosure, Matt Battiata is an underwriter of KPBS.)
Related Story: San Diego Still Has Housing Woes And Upside-Down Homeowners
CAVANAUGH: This is KPBS Midday Edition. I'm Maureen Cavanaugh. San Diego saw a bump in median real estate prices this spring, which along with other positive signs in the market continues to give hope to local realtors. Housing prices in San Diego are nowhere near where they were in the last decade. Lots of people owe on their homes more than those homes are worth. San Diego real estate broker Matt Battiata has now written a book called upside down nation. He is a broker and CEO of the Battiata real estate group. And they have been an underwriter of KPBS radio. Welcome back to the program.
BATTIATA: Thank you, Maureen.
CAVANAUGH: Doctor Michael Lee is here, director. The corky McMillan center for real estate at San Diego state university. Thanks so much for being here.
LEE: Thank you, Maureen.
CAVANAUGH: Let's start with you both, in fact, let me start with you, doctor Lee. What's your assessment of the San Diego real estate market right now?
LEE: I think we're bumping along the bottom. We've seen a couple positive signs, sliding up in pricing on the coastal areas, inventory is really tight. And so those are generally good signs. But nothing significant.
BATTIATA: I agree that we're bumping around the bottom. I think the problem is that we're going to be bumping around the bottom for quite a while. We've got so many homeowners who are upside down, it just puts a lot of downward pressure on prices. Our issue has always been affordability, and we solved that issue with the big drop that we have had.
[ LAUGHTER ]
CAVANAUGH: I want to invite our listeners to join the conversation. Want you say the worst is over for homeowners? Or are some people now just starting to feel the effects of this accumulation of high unemployment, and having to meet that mortgage payment when your house has lost so much of its value?
LEE: I don't think this is new. You're talking about people who bought between 2005 and 2007, at the peak of the market. We're almost five years running from that. So there are quite a few of those underwater homeowners that have been making their payments, and a good fraction of them will continue to do so. The problem is that if you have any problems in your affordability, unemployment or reduction in employment, sickness or what have you, then you kind of look at your situation and say I'm so far underwater, I'm basically looking for an out. The other thing is that people have been waiting a long time and realizing that house prices aren't going to be rising significantly in the mere to median term. If you need to move on, you need to change your housing consumption, move for job purposes, well, now I got to bite the bullet and say okay, I've got to get on with this,
CAVANAUGH: I wonder, about two or three years ago, and I went through this myself, I was trying to re-- oh, I can't remember.
CAVANAUGH: Thank you!
[ LAUGHTER ]
CAVANAUGH: Refinance my house. And it seemed like housing prices were going down almost every three or four months. You would need to get a new assessment of your property. Are we still in that kind of a situation?
BATTIATA: It really depends on the transactions that are occurring in your immediate area. Lenders have gotten really, really strict on appraisals for obvious reasons. So you do see fluctuations in values all over San Diego. But in general, the first time home buyer market is pretty strong. But different segments of the market, there's still some decline to come.
NEW SPEAKER: I was in a lone remodification with bank of America. I signed notarized paperwork and stuff. Then they called me back and said the loan couldn't go through because they forgot to charge me a state-mandated $556 fee that goes monthly, and it's to insure that I'm in my home, which seemed ludicrous to me. Why am I fighting to save my home if I'm not in it?
CAVANAUGH: Anyone heard about that?
LEE: No. Sorry.
[ LAUGHTER ]
CAVANAUGH: Wish you could help us there. Thank you so much for the call I would check on that. How many homeowners do we estimate in San Diego County are actually underwater?
BATTIATA: It's difficult to get accurate numbers. I believe the number is somewhere between 30% and 50%. There are mortgages in San Diego County that will don't have any money on them. And there have been reports that reported it to be 26 up to high 30s. It depends on what you're looking at to assess the values. The core logic reports have used San Diego County tax assessors' tax value, which are typically inflated. When somebody has to sell, they've got selling costs they have to factor in, and closing costs. So I believe the market is somewhere in my opinion, between 40 and 50% of the homeowners underwater:
LEE: That sounds a bit high to me, but I would probably peg it in the 30-40% range. And if you get yourself in a distressed sale situation, there's always a discount that's quite significant. That tends to make it worse.
CAVANAUGH: Going with the title of your new book, you see this as a problem all over the country, upside nation.
BATTIATA: Roughly the problems are a third of homeowners nationwide. There's 55 million homes incumbered by mortgages, 15 million of those that are underwater, that's about a third of the homes nationwide, and that's more concentrated in the sand states, California, Nevada, etc. So it's a nationwide problem. No question.
CAVANAUGH: Brian is calling from Carlsbad.
NEW SPEAKER: I'm also a real estate broker but don't get an opportunity to talk about these stats too much. I've seep recently, like in California, the notice of default period is three months, then followed by about a month of trustee sale notice, and whattive seen in the numbers is the trustee sale numbers actually, you know, the county is 4,300 or so, it's like the becamings are just sitting on inventory. That's partly why we have low enVenntory. And I wonder how they feel they will impact our market going forward.
CAVANAUGH: Thank you for the call. Is that the shadow inventory that we've been talking about for years now?
BATTIATA: It's part of it. Yeah, they're about -- currently, and Michael, you might have a better number than this. But the research I've done, there's about a half million homes that the banks are sitting on. That number has gone down. But there's about a half million homes the banks have foreclosed on and are sitting on. There's a number of homes that are going into default that aring short call sales. That's a much better economical option for them than foreclosures.
LEE: And the good news on that is that we've been seeing a decline on notices of default. And the bank's perspective, it depends on whether the properties are, in some kind of real estate owned in that particular area, they don't want to put a lot of properties out on the market statement. They're just going to drive prices down further. So they're meeting this out. And they're no longer viewed as capital constraints. So they can afford to be a little slower on this.
CAVANAUGH: When somebody has a home that is worth less than they owe it on it, besides just sitting there and waiting for real estate prices to come back, what are your options?
LEE: Well, that's one of your options, if you like the house, and you can make the payments, then you stay in that.
LEE: But then other people, as I said, if you have some problem where you now can't make theiment payments, then you've got to make a decision, and that's going to be a short sale or let it go in foreclosure.
MAUREEN CAVANAUGH: A lot of people are trying for modifications.
LEE: You do have modifications. The main program now is the heart program, which a refinance program. That doesn't address the principle modification issue because all that does is reduce your payments. Regardless of what your loan-to-value ratio is.
CAVANAUGH: It doesn't reduce the principle of the amount you owe on the home. But we've heard amount lately about this settlement that California and other states announced they made with a big bang, lots of programs basically started to help people stay in their homes and so forth. Do we know whether or not those programs are working yet?
BATTIATA: Well, even though it was relatively speaking a lot of money, relative tethe program, it really was not very much money at all. There were some principle reductions done as a part of that settlement. But in general, it's been a drop in the bucket. And what I see on the ground as far as out in the real estate market every day, is most people are denied. They do not qualify for whatever rein, for a loan modification. And their only other option then is a short sale. And a lot of the short sales that we do are people who are just making a business decision, they're upside down, the bank won't modify their own, and they can't afford the property, and they opt to do a short sale.
CAVANAUGH: Let me take another call. Bill from Chula Vista.
NEW SPEAKER: I just wanted to ask about the term loan modification. I got a strategic short sale, and bailed out about a year and a half ago, and made all miment pas. But just realized there was no way this house was going to come up to value for what I owed on it. And I drive to work and I see people in their businesses with signs, loan modification here, loan modification, and I worked for like a year. But it was just a big joke. Can you dispel this myth, please?
CAVANAUGH: Dispelling the myth of loan modification?
BATTIATA: I can't -- that's exactly the experience that the majority of people in my experience over 90% of the people that apply for loan modifications are either rejected or the bank gives them such a runaround, that they eventually give up. That's typically what people's experiences with the loan modification is. And in California, it is illegal for any company to charge you upfront for a loan mod. And my advice is if anyone wants to try a loan mod, do it on your own. Don't pay a law firm or any other company to do it. You're going to get a better result doing it yourself.
CAVANAUGH: It seems there have been so many efforts to smooth this loan modification process to make it work better. Michael Lee, is it working better?
LEE: It's not working better. And I think it really has to do with the nature of the people who are in default. So you have one class of people that really never could accord the house in the first place, and just knocking down their housing expense income ratio to 31% doesn't mean they can afford that. And so they're going to be rejected. A lot of people can't document, and that's become one of the real significant barriers here, you got to document everything now. And a lot of people just can't do that. A third is that it really doesn't address the situation like our caller had, where they kind of look at it and say maybe I can make the payments. But the reality is that I'm so far under water that the only thing that might help me is a principle reduction. That's not going to happen. We've seen too much resistance on all levels from that. While it would certainly help some homeowners, that's probably not in the cards in a significant way.
CAVANAUGH: Now, Matt, your brokerage does a lot of business in short sales, and a couple of times you've been on, and we've gotten responses from our listeners, isn't it to his advantage to advise short sales? But I'm wandering, is there risk involved when someone decides to go and try to do a short sale on their home? Does it impayroll their credit in any way?
BATTIATA: Well, sure. There's certainly negatives to a short sale. It does impact your prosecute. The primary impact comes from missed payment, really. More people are doing short sales as a last resort. But we do have a lot of people who are doing a strategic short sale. But these are people what in most cases really can't afford the property. But it does impact your credit. No question. But the property impact from the short sale process comes from missed payments. And we have a lot of people who are doing short sales who continue to make payments through the entire process. And that have a minimal credit impact. In a lot of cases it's under 50 points from the short sale itself. There are ways to do it to limit your risk. If you do that and make your payments the whole way through, there's no risk whatsoever. There are a lot of people that stop making their payments for an extended period of time, and they're racing against the chose to avoid foreclosure.
CAVANAUGH: Sure. We have been talking about this for years on this program now. And we had a big, big, big bubble in the 2000s. But it seems like we've been down a very long time now. What do you see? Isn't there a cyclical nature to this? Do you see this coming up any time soon?
LEE: We certainly know that real estate is cyclical, and the cycles are relatively long. If you look historically, you would probably end up saying that it's going to be -- if you have a significant downturn off of a bubble, that's going to be probably 7-ten years before you get back to where you were, anywhere close to the peak. Well, we're now basically six years into this. This was bigger and harder in terms of the fall than previous experiences, really, going all the way back to the depression. So it's not surprising that we haven't started to see coming out of this, and we have another four or five years to go where house prices will be flat, and the increases will be small, and certainly not help the people that Matt deals with in terms of being underwater.
CAVANAUGH: People have been waiting for years now, and there doesn't seem to be any increase in the value of their home.
BATTIATA: If you along at the numbers rationally, and this is what I've been saying for a handful of years, people come in, oh, the market's at the bottom, and it's going to come back, and this is going to be a great year. And I said how can you look at the numbers and analyze them in any realistic way and say that's going to happen? The good news is we are getting close to the bottom. It's bottom much more affordable. I believe when the market does finally start to recover, it's going to come back strong because we're in San Diego. But it doesn't do anybody any good to, you knowing speak in platitudes and say, oh, it's going to be fabulous, and the market is going to be coming back right away. All these people who owe at peak values, if for any reason they have to move, job transfer, they get divorced, there's a huge percentage of people who bought at the peak who are upside down.