San Diego Real Estate Looking Less Anemic
October 23, 2012 12:51 p.m.
Dr. Michael Lea, director of The Corky McMillin Center for Real Estate, San Diego State University.
Matt Battiata, CEO, Battiata Real Estate Group.
Related Story: San Diego Real Estate Looking Less Anemic
CAVANAUGH: Our top story on Midday Edition, signs that the nation's real estate market is coming back to life. Numbers show that housing starts are up, and default notices hit their lowest level since 2007. Joining me, doctor Michael Lea, director of SDSU's Corky McMillin center for real estate. Welcome to the show.
LEA: Thank you, Maureen.
CAVANAUGH: And Matt Battiata is here, broker and CEO of the Battiata real estate group, they have been an underwriter of KPBS radio. Good to see you.
BATTIATA: Thanks, Maureen.
CAVANAUGH: Mike, the government says construction start are at their fastest pace since July†2008. What does that actually mean? Does that mean the demand for new homes has returned?
LEA: To a degree, absolutely. Remember that we have had four years of very, very low levels of starts, and now we have a situation of continued low interest rates, so we're seeing some interests picking up and people wanting new homes. So I think it's about time.
CAVANAUGH: Does that also mean that lenders are willing to finance construction again?
LEA: I think that this is construction finance out there. For example, Wells†Fargo is one of the board members for the corky McMillan center for real state, and they said that they have been increasing the volume of construction loans that they're doing.
MAUREEN CAVANAUGH: Now, I just talked about the national statistics. What have we seen here in San Diego? Is housing construction rebounding or increase something
LEA: To a small degree, the answer is yes. What we don't have going on is very little in the way tract home development. So we see a lot of in-fill, and multifamily is the real -- moving forward with regards to housing starts.
CAVANAUGH: Now, what's the correlation between increased housing construction and the real estate market?
BATTIATA: Well, as Michael said, it's all relative. So housing starts are up, and definitely up in San Diego as well, and that's great, but it's relative to virtually no new construction going on over the last few years. The biggest issue that we have in San Diego is we have most of these -- most new construction for single-family homes is not first-time home buyer. It's difficult for them to build first-time home buyer homes because it's not affordable for people. So most is a trade-up buyer, a home $500,000 and above. The problem is that most of those -- we've lost our trade-up buyer in San Diego County because most of them are upside down. They can't sell their home. If they were to sell, it's going to be a short sale, which means in most cases they can't buy right roadway. So that's the catch 22.
CAVANAUGH: And when we talk about new housing start in San Diego, does any of this indicate that housing prices -- values might be increase something
LEA: Well, I think the fact that we are seeing some increase in demand juxtaposed against a real tight supply suggests that prices are going to rise a bit, not by large amounts. Supply is constrained in large part because such a high percentage of existing homeowners can't sell. And so supply is going to remain tight for I think the near future. And then it becomes a question of where's the demand going to come from? As Matt said, we've been seeing more activity in the trade-up markets, so sales activity has actually increased in the mid to high-priced parts of the market. It's flat in the low-priced, which is a function of the fact that we're seeing fewer foreclosures in the market. So those things suggest that the price statistics that you see are going to continue to look relatively good.
CAVANAUGH: Well, there we go. You mentioned the fact that foreclosures are down. Data quick says the number of homes entering foreclosure in California is at its lowest level since 2007. What does that tell you about where the market is?
BATTIATA: Well, it tells a few things. The biggest issue that we have in our market here is in San Diego, is we've got all these upstairs down homeowners, and right now, we do low inventory which is great. What we're not factoring into that is that term shadow inventory. And that's people that we think at some point are going to go into default, which means their homes are going to be hitting the market as a short sale or as a bank-owned foreclosure. Shadow inventory consists of homes of people that are upside down, and they're statistically likely at some point to go into default. People that are already behind in their payments and are in default 30 or 60 or 90 days behind, homes that are in foreclosure, and homes that have been foreclosed on by the bank and the bank is just sitting on them. Nationally, that's a huge, huge number, about eleven million homes, which is about 1/5 of all the homes that are encumbered by mortgages. And Lori Goodman, an analyst at Amherst Securities, she's predicting that there's going to be still 8-10 million foreclosures coming down the pike. That means that we're less than halfway through the situation. So that doesn't bode well for the future of the market. The issue here in San Diego like in a lot of marketings is all these people that are in homes that they're upside down that they can't afford or simply don't want, we have to flush those through the system before we can get back to eye normal market that'll start appreciating for the long-term.
CAVANAUGH: Can you remind us, what is a short sale?
BATTIATA: A short sale is which a homeowner sells their property, and they owe on it more than it's worth. So they owe $500,000, but the house is only worth $35,000,000. The bank will agree to take the loss, that way the homeowner can move on, and the bank has realized that a short sale -- they lose a lot less money on a short sale than they do on a foreclosure. So they have finally gotten to the bank that they would much prefer to do a short sale than a foreclosure.
CAVANAUGH: Data quick in talking about the fact that there are fewer homes entering foreclosures also tells us that short sales are up 19% over a year ago. Does it seem to you that banks are more willing to do these short sales than they used to be?
BATTIATA: Definitely because they've realized that they lose a lot less money. It's a much more effective way for them to liquidate that's upstairs down real estate. They incur a lot of legal expenses by going through the foreclosure process and end up selling them for a lot less than a short sale.
CAVANAUGH: There was also a note in the article that I read that the short sale boom could go bust by the end of the year, falling off the fiscal cliff in the -- the feature in the tax code is set to expire that does what?
BATTIATA: The mortgage tax debt forgiveness relief act at both the state and federal level expires December 31st of this year. When you do a short sale, it's debt forgiveness. The bank is agreeing to forgive debt. The IRS and the franchise tax board look at debt as forgiveness income. You used to owe $500,000, the bank let you off the hook, so to us that's like you just made $150,000. That's the way they look at it. Therefore they say you have to pay ordinary income taxes on that $150,000. On your primary residence right now, you don't have to do. If this bill is not extended, when you do a short sale or if you go to foreclosure, and the bank writes off $100,000, that will get added to your income for the tax year.
CAVANAUGH: Which would bring the whole thing to a screeching halt.
BATTIATA: Yeah, which is why we're pretty confident for it to be extended. Right now, Obama has include today in his budget for 2013. We're pretty confident it'll get extended. But there's never any guarantee. So we're doing a lot of short sales right now for people who are rushing to get them done by the end of the year.
CAVANAUGH: Michael, a number of years we've been saying only people who had to sell would sell with housing prices so depressed. We have seen though a number of articles recently saying that home values are starting to come up. So should we start to see that inventory growing here in San Diego?
LEA: Well, I think that there are two things that are going on with rising house prices. You need to take into act, one, is that as prices go up, we actually do reduce the supply of negative equity or very, very small equity properties. So some of those people might be getting into a situation where they would contemplate selling. But on the other hand as prices rise, it's probably more an issue for the first-time buyer market, affordability is still an issue for that segment of the market. So I think it's probably good for the trade-up resale market, but maybe not for the first-time buyer part of the market.
CAVANAUGH: That's interesting. A lot of people have said to me they keep telling me housing prices are down, and then I go out and look for something, and I still can't afford anything! So it still hasn't depressed the first-time buyer opportunity, has it?
BATTIATA: You know, depending on where you're looking in San Diego County, prices are down in a lot of areas 40-50%, in some areas it's more than that, and in some areas it's less than that. The first-time home buyer market Tdid go down, but it has come back to a degree. The saving grace right now, approximate it really is a blessing, that interest rates are so incredibly low. It makes a big difference. So that's a really huge sign. The other thing is the Fed is being up $40†billion in mortgages a month, that's also huge. Our real estate market right now is the foundation of it is the government -- the GSE is buying loans from the banks F. They weren't doing that, investors would not be funding mortgages. So thoser two very, very good signs for the future of the market.
LEA: They're good signs, but I would say that they don't really reflect fundamentals.
BATTIATA: No, I agree.
[ LAUGHTER ]
LEA: They're artificial in that regard, in that one needs to be cautious with regard to where the housing market is going because it's still heavily, heavily dependent on what the government and what the Fed are doing, and if any of that changes, that could turn the market negative.
CAVANAUGH: So Mike, what needs to change? What still needs to happen to get the real estate market on I rolling level again?
LEA: Well, I think that Matt's point is the important one. We still have a significant shadow inventory out there. One thing with the delinquency rate, with the mortgage modifications, about a quarter of all loans have been modified are back delinquent again. So that's not a particularly good sign for what's going to happen with the volume of short sales and foreclosures. So I think we have to reduce significantly that overhang from the shadow inventory, that's going to be then reflected in leasing prices because you're going to have a lower percentage of transactions that are distressed. And that's going to then turn around and feed into confidence and increased inventory being put on the market for sale. So I think we're still dealing with the overhang if you will, and that's probably going to take another couple of years before we really see significant continued gains in both prices and sale volume.
CAVANAUGH: Thank you both very much.
BATTIATA: Thank you.