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San Diego’s Housing Market on Slow Road to Recovery

A sold sign is posted in front of a home at a new housing development in this...

Photo by Justin Sullivan / Getty Images

Above: A sold sign is posted in front of a home at a new housing development in this undated photo.

While there seem to be a few positive signs for the San Diego housing market, experts agree the downturn has been unprecedented and perhaps just the beginning.

The most recent good news comes from a report that shows home values grew on a monthly basis for the first time in three years. Prior to May, home prices had been in steady decline since July 2006.

The bad news is it only grew by 0.4 percent, and the housing market usually has some sort of upswing in the spring or summer.

From January to June 2009, RealtyTrac reported there were 30,297 foreclosure filings in the San Diego-Carlsbad-San Marcos area -- one in every 37 homes. That’s a 7 percent increase from the previous six months, and only down 0.5 percent from the same period last year.

“I think we’re skipping along the bottom of the market right now,” said Gary H. London, a strategic consultant and real estate economist. “We’re seeing an uptick in housing prices and home sales. I’m not sure whether or not that’s a false indicator, but I think it’s safe to say we’re bumping along the bottom right now. I’m not exactly sure if we’ve entered the bottom or we’re already there -- but we’re definitely near the bottom.”

London said during the boom-and-bust real estate cycle in the 1990s, the San Diego market peaked in 1989 and didn’t start to recover until 1996.

“To me this feels like 1992. The worst is over, or at least almost over, but even as things improve it’s going to be a long slog,” he said.

Another positive indicator is that median home price has increased for three months in a row, hitting $314,250. That’s the highest it’s been since October, and up more than $30,000 from the low in January 2009. Part of the reason for the gain is that there are just fewer, less-expensive houses on the market to drive the price down. In fact, the county's median price rose $19,250 from May to June -- or 6.5 percent -- the biggest one-month percentage gain recorded by MDA DataQuick since it began keeping records in 1988.

“This is my fourth time on this merry-go-round and I’ve never seen it this bad,” said Mark Goldman, a finance lecturer at SDSU and mortgage broker with Cobalt Financial.

“I think we’re getting near the bottom,” he said. “Entry-level pricing is a very hot market and as the cost-to-own per month is approaching what it costs to rent, then I think we’ll be near the bottom of where the value is going to be.”

Goldman said the market may see a 35-40 percent correction before getting back on track. Despite having increased in San Diego for three months in a row, the median price had been in free-fall the previous 30 months. In 2008, the median home price was $359,000, a loss of more than 25 percent from 2007.

“Right now there is a dichotomy in the market,” said Shane Pliskin, lead sales associate with Prudential California Realty. “If you look at the market below $500,000 and especially below $400,000, things are flying off the shelves. It’s not uncommon to get 10 to 15 and upwards of 25 offers per home. The inventory is depleted, it’s the lowest the inventory has been in years.

The lenders that originated the most loans that went into default last quarter were Washington Mutual, Wells Fargo and Countrywide. Along with Bank of America and World Savings, they were the most active in 2006. Their default rates are all below 10 percent, far below the rates of Argent Mortgage (55.1 percent of loans resulting in a default notice), WMC Mortgage (54.6 percent) First Franklin (51.8 percent) and New Century Mortgage (50.8 percent).

Pliskin said his office has a personal record of 33 offers on one property. In North County, he read about one property that fielded 80 offers. There’s less than six months inventory for entry-level homes, compared to 15 months or more of inventory for pricier homes. Aside from a huge $23 million sale in La Jolla, Pliskin said, no one is buying at the higher end.

“Above $600,000, and especially above $800,000, they’re dead and they’re not going to move because there are no loan products at that level. Banks are pulling back on (real-estate owned) assets,” he said.

Pliskin also said that Fannie Mae alone has 600,000 assets nationwide they’re sitting on and not putting on the market. Countrywide Financial, he said, has the largest private “shadow” inventory due to the company’s absorption of many of the liar loans left after the sub-prime crash.

“I believe banks aren’t reporting the depth of their inventory out there,” he said.

Banks, Pliskin said, are in serious trouble and trying to shore up their bottom line before the end of the fiscal year, which typically ends in June, July or August.

Starting Aug. 15, he said, banks are going to open up their coffers and by end of the third quarter 2009 there will be a huge influx of real estate owned products.

That will mean, instead of the typical pattern of low sales in January and a peak in May or June, there will be a “W-effect” in 2010, Pliskin said, with sales up in the beginning, middle and end of the year with slight valleys between.

“Most first-time home buyers are benefiting from the $8,000 credit and there are some huge investors coming in and taking advantage of a very healthy rental market,” he said.

One of Pliskin’s clients in Northern California is buying as many $100,000 level homes as possible, with the reasoning being there will always be a market for $900/$1,400 rentals from people who can’t afford homes or are new to the area.

“There’s more cash in the market than ever before because of the ability to buy and turn them around,” Pliskin said. “He puts a coat of paint on it and then he can rent it.”

A friend of Pliskin’s who works in trustee sales in San Diego County said he is averaging 30-40 sales per day. Once the inventory gets squared away, Pliskin says pools sales of properties will be occurring in groups of 10s, 100s and even 1,000s of homes. In 2008, 25 percent of California real estate sales were by investors not from here -- either out-of-state or foreign.

“Once the floodgates open, it’ll happen again,” he said.

And the foreclosures aren’t slowing down either. From January to June 2009, RealtyTrac reported there were 30,297 foreclosure filings in the San Diego-Carlsbad-San Marcos area -- one in every 37 homes. That’s a 7 percent increase from the previous six months and only down 0.5 percent from the same period last year.

In California there were 45,667 foreclosures from April to June 2009, an increase of nearly 5 percent from 43,620 for the prior quarter.

More ominous is the fact that California default notices were quite active the past six months. While default notices don’t mean anything alone, they are indicative that the backlog of delinquencies that banks had been letting pile up, are starting to move through the foreclosure pipeline.

DataQuick reported that lenders sent out 124,562 default notices from April to June 2009. Three months prior to that, a record 135,431 default notices were sent out.

Gabe del Rio, vice president of homeowner ship for Community Housing Works said in the past 18 months he and the staff of his City Heights office have created a foreclosure intervention center and together his group is helping about 2,500 households this year.

“What we’re seeing right now is it’s almost ‘first in, first out,’” Del Rio said. “So the first wave of people who have a problem with their loan, or with paying their mortgage, are the people who were hit the hardest.

“(Lately) it’s been a roller coaster, and we’ve had to twist into a pretzel, to meet the demand of the foreclosure crisis in our region,” he said, listing off communities like City Heights, Southeast San Diego, Barrio Logan, parts of Chula Vista, Oceanside, Vista and Mira Mesa as areas more heavily affected.

Many, if not most of the loans made in 2006 are no longer offered by the institutions that made the loans. In some case, the mortgage was sold off after the original loan, but most recently it’s because many of original institutions no longer exist -- like Argent, New Century and WMC Mortgages. The "servicers" pursuing the highest number of delinquencies last quarter were JP Morgan Chase, BAC Home Loans Servicing and Mortgage Electronic Registration Systems.

“Most people who had sub-prime loans were at the entry level of the housing ladder. They took risky loans that they shouldn’t have taken and they cheated on them,” London said. “The whole sub-prime crisis was a result of a corrupt system. Consumers lied, brokers facilitated it, lenders looked the other way and sent it along to investment bankers who didn’t care to check the numbers. The problem was everyone gained, at least temporarily. That won’t happen -- at least that way -- the next time around.”

Goldman called what happened before the sub-prime crisis “a period of stupid money.”

“Anyone who wanted to, could go buy housing. People wanted to buy a home and four years ago there were no hoops to jump through. The market mentality was ‘buy now because you won’t be able to afford to later,’” Goldman said.

“Some people blame the ‘foolish homeowners’ or the loan originators, but if you offer a drug addict all the free heroin they want, you’re going to have a lot of dead junkies lying around,” he said. “There’s plenty of blame to go around, but least of all, I blame the consumer — of course they’re taking the free money.”

The one thing everyone agrees on is the fact that San Diego may recover faster than other parts of the United States due to several factors, including its weather, land scarcity and housing supply.

“San Diego as a region is in not too bad of shape. It’s not oversupplied like other markets, markets that are far worse off like Phoenix, Las Vegas and Miami where there are thousands and thousands of empty units,” London said.

London, who heads his own real estate consulting and feasibility firm in San Diego, said he differs from most people on the eventual market correction. His belief is that the market now is filled with “have-to” sellers,” as opposed to “want-to” sellers, which drives the price artificially down.

“Most people have elected to not participate in the housing market, unless their home is in distress or imminent foreclosure,” he said. “Most people will sit on the sidelines and wait. Because of that, the house price index cannot be accurate.

“Over the next three years, the market should stabilize some and we’ll see small increases in home prices and in three to five years there will be a sharper increase. In addition to having a low supply of inventory, the builders have all gone out of business so what you have is the demand outweighing the supply which will cause an increase in price.”

San Diego County's construction industry has lost plenty of jobs over the past few years. It employs 66,700 workers today, down from the peak in 2006 when the industry provided nearly 100,000 people a place to work.

Alan Gin, an economist at the University of San Diego, said San Diego’s military roots have helped deflect the brunt of the residential and commercial building downturn. At Camp Pendleton and Miramar Marine Corps Air Station alone, the Navy awarded construction contracts totaling $591 million last year -- nearly double the value of building permits for nonmilitary structures, excluding schools and warehouses, which last year totaled $339 million countywide.

“Ultimately it’s all about jobs, you can’t separate the two. Most people can’t pay their mortgages with no resources and you can’t pay your mortgage without a job,” London said.

“The market is starting to show signs of life, but it’s not there yet. The problem is people think they’re going to wake up one day and the market will have recovered overnight. That’s not going to happen. It took us a long time to get there and it’s going to take us a long time for us to get out.”

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