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Mixed Report On San Diego's Real Estate Market

September 16, 2013 1:13 p.m.


Michael Lea, director of SDSU's Corky McMillin Center for Real Estate.

Gary London, a real estate economist with the London Group Realty Advisors.

Related Story: Mixed Report On San Diego's Real Estate Market


This is a rush transcript created by a contractor for KPBS to improve accessibility for the deaf and hard-of-hearing. Please refer to the media file as the formal record of this interview. Opinions expressed by guests during interviews reflect the guest’s individual views and do not necessarily represent those of KPBS staff, members or its sponsors.

MAUREEN CAVANAUGH: Our top story on KPBS Midday Edition, San Diego's home sales and housing prices took a slight dip last month, surprising some experts but as always there are a number of different ways to look at San Diego's real estate market. And there are changes ahead. Most notably in the reduction of federally backed home loans that could make the volatile market even more unpredictable. I'd like to welcome my guests, Dr. Michael Lea is director of SDSU Corky McMillan Center for real estate and Michael Lea, welcome back to the program.

MICHAEL LEA: Thank you, Maureen.

MAUREEN CAVANAUGH: And Gary London is here. He's a real estate economist of the London group Realty advisors. Gary, welcome back to you.

GARY LONDON: Thank you.

MAUREEN CAVANAUGH: Now Michael, let's talk about the housing numbers released last week. August home sales were up from last year, but UT San Diego reports they actually get nearly 10% from July to August. What you think is happening?

MICHAEL LEA: I think we are still in somewhat of an unstable market. What we have, sales have been increasing. We still have a fairly low sales and inventory compared to recent history and we have a market that has a lot of fragility in it. On the demand side we are seeing rising interest rates and that's going to slow demand. On the supply side we see a lot of people who have zero or negative equity and campus at their houses on the market without taking a loss so I think those factors are driving the bigger picture.

MAUREEN CAVANAUGH: there was a slight dip in the median housing prices from July 2 August of this year are we expecting housing prices to move in a steady upward direction.

MICHAEL LEA: I think they're going continue to move upward but I don't think we will see the rate of acceleration that we've seen over the last year and this is probably the first sign of a slowing of the market.

MAUREEN CAVANAUGH: The first sign of a slowing in the market, just a $2000 difference between July and August in home prices. Is that right?

MICHAEL LEA: Again, I think we've seen month to month very big changes and clearly had a big year-to-year change in house prices but the combination of factors both in terms of demand and supply are working to slow the market increase, the price increase.

MAUREEN CAVANAUGH: Let me ask you, Gary, what impact do you think this has, as interest rates climb up, what impact does it have on the market?

GARY LONDON: This has been a market that has been characterized that a lot of still residual distress sales a lot of cash sales. We now see a functional transition take place to a more normalized market and the fact that interest rates have been low really has not matter to most of the marketplace because most buyers have not had the credit capacity to take out the loans. So from their perspective, the lending window has been glued tight. So with interest rates on the increase that might not matter as much as people think. That might end up as an opportunity on the part of prospective buyers to achieve loans when they could not achieve them before partly because the lenders did not want to lend the money at the low rates.

MAUREEN CAVANAUGH: And Michael says also there is still low inventory. Are sellers still reluctant, Gary, to list the property even though prices are up 20% over last year?

GARY LONDON: They are not psychologically reluctant, the problem is that even though we've reached approaching 20% of the 2006 value of peak in San Diego the reality is that most people who bought during the upswing to the peak of the market are still underwater. So it's going to take a while for these people to realize, to get over the equity help them get into a position where they can actually list their homes and sell and not lose money. That's part of the functional transition that I'm talking about, the people that have been listing and selling over the past year are people who purchased homes long time ago and have equity in their homes. We have not seen the next stage of sellers out there listing, although I should tell you we are seeing almost near-normal levels of sales over the past three or four months. So we are almost functioning in a near-normal market again and that is really since 2006 that I could say that.

MAUREEN CAVANAUGH: Michael do you agree with Gary's idea that interest rates are moving up is not really going to have much of an impact on the real estate market in San Diego?

MICHAEL LEA: I think if we're talking about modest increases that is probably true and we are starting to see some signs that lenders are starting to loosen up. We are seeing some higher loan to value ratio loans being done and that can offset as Gary said some of the interest rate rise.

MAUREEN CAVANAUGH: I'm wondering Michael, who are the successful buyers now?

MICHAEL LEA: We are seeing a transition in the market we've had particularly in the lower end of the market as Gary mentioned a lot of cash sales and investors driving the market and I think we are starting to see investors pull back from their purchases, prices have risen such that they don't see the gains perhaps that they saw a couple of years ago. Actually got is going to return the market to a more normal level where I think that fundamentals will rule and not something very unique as we have with the investor part of it.

MAUREEN CAVANAUGH: I think the last time we talked we mention the fact that there were some bidding wars going on when houses on time-to-market. They would be inundated with offers. Is that still happening, Gary?

GARY LONDON: No I think that part is over. I think that has been the result of that has been a bit up in housing prices we've seen over the past year and I think we sort of got to the price level where you are seeing that action proceed if not go away completely. We are going to see a continuation of an increase in housing prices, but certainly not the 20% year-to-year level, or 25% year-to-year level that we've seen. It's probably going to dip into the single digits so that would be my definition of what Mike said is going back to near normal levels.

MAUREEN CAVANAUGH: You're nodding your head, Mike, so the 20% year-to-year increase is not sustainable?

MICHAEL LEA: No, it is absolutely not sustainable. We've got factors that lead us to the more normal level less influence to distrust or, investors less distressed sales, somewhat higher interest rates and more people moving out of negative equity which should increase the sales and inventory.


GARY LONDON: I've got some good news and bad news on this topic. The good news is that demographics are going to matter. The biggest population cohort, our millennials, people in 20s or early 30s and they are just getting ready to become buyers. They are a little slower than their fathers and mothers and baby boomers were to get started in the market but they're going to go back to the market in big numbers which ultimately will drive up sales. The bad news is that there's a perpetual slow addition to new housing supply in San Diego. And that is not just a seasonal thing, that's just not a 2013 thing, that's probably a permanent thing so we are always going to be behind the eight ball in terms of the supply demand equilibrium.

MAUREEN CAVANAUGH: What are we seeing in terms of home construction in San Diego? Remember it was flat lined for a number of years. Are we seeing more of an increase in that, Gary?

GARY LONDON: From a percentage perspective we are but from a reality of delivery perspective we are not. We are still on the delivering well under 5000 units a year even during this past year and frankly most of those are apartments. What isn't an apartment what is a for sale most of those are condominiums. The big crisis in our market going forward is going to be our failure to deliver more single-family homes to this marketplace. Which with respect to that portion of the inventory is going to drive up prices that are significantly.

MAUREEN CAVANAUGH: I want to talk to you, Michael about the mortgageside of the real estate market. Bloomberg reported a story last week that some mortgage lenders are trying to make it easier for people to get mortgages, lowering some of the lending requirements. Accepting lower credit ratings, increasing the loan to value ratios. Does this raise any red flags for you as we watched home prices and interest rates go up?

MICHAEL LEA: No, not yet. We're still talking but fairly modest changes off a really tight lending environment. So I'm not too concerned from what I'm hearing so far.

MAUREEN CAVANAUGH: I'm wondering let me ask you both let me start with you, Michael, where would you say we were in the housing recovery?

MICHAEL LEA: I think we are probably 80% of the way back.


GARY LONDON: If you use baseball parlance, we are in the third inning. I think we have a long way to go.

MAUREEN CAVANAUGH: Okay now, I asked the question because some people are concerned about what Fannie Mae and Freddie Mac, and what people in Washington propose to do about those two huge federally backed government loan agencies. They are planning to lower loan caps in January. First of all, what does that mean Michael to lower the loan?

MICHAEL LEA: It is the maximum loan size that those agencies can purchase. So it is is going to reduce supply of federally backed credit borrowers that no longer qualify are going to pay slightly higher rates for what we call jumbo mortgages.

MAUREEN CAVANAUGH: And why are they considering doing that?

MICHAEL LEA: There is strategy in place to reduce the footprint of the agents if right now if you add an agent FHA the government is backing over 90% of all mortgage credit and I think most analysts believe that's not sustainable or desirable outcome. So, one way you reduce the government impact is to reduce the maximum size of the loans they can purchase.

MAUREEN CAVANAUGH: so on Wall Street market watch when they listed the areas of the country that might be affected by lowering the maximum loan cap for Fannie Mae and Freddie Mac San Diego figures as one of them. You feel therefore if that happens is plan in January that that could influence the recovery in the real estate market?

MICHAEL LEA: To some degree, but again I don't think it's going to be a major impact because right now you're seeing the pricing of good quality jumbo not government-backed loans to be pretty much on par with the rates that the agencies have been charging. So I do not see a big increase in rates and therefore I don't see a big impact in the short term in our market.

MAUREEN CAVANAUGH: Gary, are private lenders going to have to step up if indeed these loan caps are introduced by Fannie Mae and Freddie Mac?

GARY LONDON: They will definitely that of the market in a question about that. In San Diego the nonconforming jumbo loans are (inaudible) the market is bifurcated.

MAUREEN CAVANAUGH: Tell me more about the bifurcated market because we see a lot of recovery on the coast but not as much inland.

GARY LONDON: That's been the case of the past couple years and it will continue to be the case because the markets to the east in the markets to the south have been slower to recover, price appreciation has been left, qualification has been tougher and innocence that is the way it's always been in San Diego. I see that is continuing. So you will see a healthier, more vertical price appreciation situation in places close to the coast for the foreseeable future.

MAUREEN CAVANAUGH: And let me ask you too, Gary, about downtown we talked during this session we talked a lot about downtown being both overbuilt residentially and commercially. What are we seeing now in terms of vacancies in downtown San Diego?

GARY LONDON: There's a lot of vacancy in the commercial sector. That's the subject of a different radio show, I think. But on the residential sector there's almost 2 dozen high-rises in downtown in the pipeline. The ones that are coming back to the market first, that are actually under construction or about to be under construction are apartments. And those later on we are going to see condominiums added to the inventory, then we will eventually see the apartments that are being built probably converted to condominiums, but that is three, four, five years into the future.

MAUREEN CAVANAUGH: Michael you were at real estate summit on Friday. What kind of things did you hear from people in the industry about what they are seeing?

MICHAEL LEA: A lot along the lines of what we are saying, which is we are seeing a return to some more healthy supply demand type of levels. We have a situation as Gary indicated where we both have a very limited supply of new housing coming onto the market. And that housing is tending to be very high-priced. So I think and affordability issue is still here and will be here pretty much for the indefinite future. For San Diego. And the other thing we talked about was what is happening with the mortgage market, mortgage rates rising and the potential change in the structure of the secondary market.

MAUREEN CAVANAUGH: And the affordability issue that you are talking about, if I understand it correctly is the age-old problem that we have here in San Diego where housing prices are out of reach for a lot of people who live here because wages tend to be low and housing prices tend to be high. Is this the old problem coming back?

MICHAEL LEA: Well it's never gone away and a large part of it is regulatory. When you talk about the impact of regulation on the construction of a new house you are talking anywhere from $100-$200,000 that is really added to the price of the house because of all the impact fees zoning requirements etc. that are placed on the developments.

MAUREEN CAVANAUGH: I see, I wondering we are running close to our time here, but I want to ask you both let me ask you first, Gary, what advice would you give people are interested in entering the real estate market now either as buyers or sellers.

GARY LONDON: Well, if we are right, and prices are going to continue to rise at whatever rate, then I would give the advice I've been giving the last few years. Which is, now is the time to buy. And, enjoy the rate of the valuation increase because even though it's not as big a bargain as it was a couple years ago when we were having this conversation, it is still sort of a bargain to buy a house today, from an interest rate rising perspective and just from a valuation perspective. So I would say find the house that you want to live in. It's going to be tougher and tougher both from a supply and demand perspective and there's really no reason to delay. Because what we are going to find a year from now is even a tighter housing market from the perspective of those who want to get into it.

MAUREEN CAVANAUGH: And for sellers, Michael? Should they hold on a little bit longer to see if the prices keep going up?

MICHAEL LEA: It's partially psychological. People don't want or think about selling at a loss but it really depends on your individual circumstances. I would not pass up a job in other kinds of economic opportunity simply because you are not going to people to buy upward to a lateral transfer. On the other hand if you don't have those economic reasons for selling, then probably holding on for a while longer as prices continue to rise is not a bad strategy.

MAUREEN CAVANAUGH: I want to thank my guests. Dr. Michael Lea is director of the Corky McMillan center for real estate. Gary London is an economist the London group Realty advisors. Thank you both very much.

MICHAEL LEA: Thank you

GARY LONDON: Thank you, Maureen.