Monday, August 30, 2010
The National Association of Realtors reported last week that sales of existing homes dropped by a record 27 percent in July. We'll discuss how the expiration of the federal homebuyer tax credit is impacting the local and national housing markets, and we'll talk about the pros and cons of the record-low interest rates that are available right now.
ALISON ST JOHN (Host): And you’re back on These Days. I’m Alison St John sitting in for Maureen Cavanaugh. The real estate market is as unpredictable as the stock market these days, at least for people who are not in it for the long haul. It looked to some as though we might have hit bottom on home prices recently, but the news that homes sales fell radically last month may mean that we haven't reached the floor yet. Whether you are a buyer, a seller or a wannabe buyer or a wannabe seller, or just a bemused observer, the real estate market is providing us with a wild ride. We’d like to hear from you in this segment so remember you can always join us by calling us at 888-895-5727. And here to analyze the latest data on real estate, we have in studio Dr. Michael Lea, director of SDSU's Corky McMillin Center for Real Estate. Dr. Lea, thanks for being here.
DR. MICHAEL LEA (Director, Corky McMillin Center for Real Estate, San Diego State University): Thank you, Alison.
ST JOHN: And also Mike (sic) Battiata, CEO of the Battiata Real Estate Group. Matt.
MATT BATTIATA (CEO, Battiata Real Estate Group): Good morning. Thank you.
ST JOHN: Good morning, Matt. Glad you could be here. So, Dr. Lea, let’s start off with the basics here. What are the factors that led to this large drop in the number of home sales in July, specifically here in San Diego County?
DR. LEA: Well, I think there’s two factors that are at play here. One is that we’ve had policy interventions at the government level through the home buyer tax credits that probably moved sales forward. So you saw a healthy sales volume in the spring and that was boosted, I think, by the sales tax credit. The other thing is the economy itself, is that we came into the spring thinking the economy was on the rebound, that unemployment was going to fall, and we’re finding out that the overall economy is not as healthy as we thought. Unemployment rates have actually risen in San Diego and I think that’s a factor as well.
ST JOHN: And home sales in San Diego actually fell less than in the rest of the country, isn’t that right? Is there any explanation for that?
DR. LEA: I think perhaps the fact that San Diego went into its slide a little bit earlier than some other parts of the country may be at play. It’s hard to know what specifically is driving San Diego because the economic indicators aren’t that different from the state or the federal level.
ST JOHN: So, Matt, were you surprised to see those sales dropping so dramatically last month?
BATTIATA: No, no, I really wasn’t. If anything, I was a little surprised that the market was as strong as it was in the spring.
ST JOHN: Hmm.
BATTIATA: But I think it was a combination of both the homebuyer tax credit but also seasonal. You know, spring is usually a busy time of year and the market kind of creates its own psychology. You know, the big issue that we still have is we have a lot of people in default and a lot of people that can’t afford their homes and we have to wash those through the market before we get to the bottom. So I wasn’t surprised by the market slowing down at all.
ST JOHN: In fact, maybe it was a bit of a surprise that the tax credit made such a big difference.
BATTIATA: I was really surprised by that. Yeah, I really was. But, you know, again…
ST JOHN: Because it was…
BATTIATA: …it’s partially – It is partially seasonal. You know, even on a good year, the spring is a busy time and once we get to mid-summer the market tends to drop off and this not being a good year, it was a little bit more dramatic. But there definitely are – the government intervention that’s going on with the homebuyer tax credit and the bailout and so forth, unfortunately, I mean, it is softening the landing but it’s also prolonging the agony. So everything that the government is doing to intervene to the real estate market is, unfortunately, just pushing out the bottom.
ST JOHN: So now we’ve got this situation and I guess everybody’s sort of waiting to see, okay, so how is that going to affect prices and, you know, Dr. Lea, do you see that having a depressing effect on prices in San Diego?
DR. LEA: Yes, I do. I think that the price data that we see is typically reported with a lag and so it does not reflect the significant decline that we saw in July for home sales. So I think that as we see those numbers being reported, we’re going to see a decline in house prices. That said, you always have to factor in that real estate is local and so it’s going to be, you know, differentially around different parts of the county.
ST JOHN: So let’s start right in with a call. We’d like to involve you, our listener. 888-895-5727 is the number. And Steve from La Jolla is on the line with a question. Go ahead, Steve.
STEVE (Caller, La Jolla): Hi. You’ve been alluding to the level of government intervention and I’m curious if you know from the history of housing cycles if there’s every previously been a similar level of federal government intervention to try to support housing prices during a housing bust? Or is this recent activity relatively unprecedented?
ST JOHN: Dr. Lea?
DR. LEA: Well, I think you have to go back to the Depression to see the real federal policies that we still have today. That’s when we created the FHA, that’s when we created Fannie Mae to finance FHA mortgages, federal home loan banks to finance savings and loans. So we had unprecedented action in the thirties but in terms of support of the market like you see today, no, we’ve never had these mortgage modification programs like this and, obviously, the tax credit is something new.
ST JOHN: I mean, Matt, you’re saying that, you know, it’s prolonging the agony but at the same time there’s also been some government programs to try to help people who are in agony.
BATTIATA: No, the – I mean, the – that’s the purpose, definitely, of the government programs, is to stop foreclosures.
ST JOHN: Umm-hmm.
BATTIATA: The problem, and I’ve been to Capitol Hill now two years in a row to argue this point, is that the government has made these programs basically voluntary for the banks to participate in and what the banks are doing is going through the motions. So the loan modifications that the banks are ostensibly doing are – they’re band aids, they’re not – They’re not enough and they’re not – In other words, they’re not big enough modifications and the overwhelming majority of people that apply for them don’t qualify and that’s a huge shadow when we talk about shadow inventory on the market, is the number of people that are in these loan modification programs who, in the end, really are not going to be able to afford their homes even if they qualify. And the percentage of people that qualify for loan mods is about 5% of the people that apply. So, unfortunately, all these people that are in these loan mod programs eventually are going to end up being worst case a foreclosure and best case a short sale.
ST JOHN: Was that also a surprise then that that government program, unlike the one where they were offering incentives if you buy, the program to help people stay in their homes doesn’t seem to have been as effective as thought.
DR. LEA: No, and I think a big factor there is negative equity. You find that about 25% of all homebuyers have negative equity, or homeowners have negative equity right now. And the modification programs simply focus on lowering your mortgage payments but for people that are 20, 25% or more upside down with high back end debt ratios even after loan modification, the fact of the matter is that unless you substantially reduce their principal, they’re still not going to be in an affordable situation.
ST JOHN: Is that a program that has a finite end point like the incentive program?
DR. LEA: No, I don’t know that it has a finite end point but the pace of modifications has slowed dramatically.
ST JOHN: Umm.
DR. LEA: I think that we’ve hit the end in terms of people who were potentially going to be able to qualify and we’re finding that the proportion that permanently get modifications is, you know, very low.
ST JOHN: So let’s go back to this issue of home prices, which I’m sure a lot of people are watching very carefully. The fact that home sales have dropped so much, Matt, can you talk a bit about how that might affect different areas of the San Diego market. Where might the fact that, you know, sales have dropped really affect prices most?
BATTIATA: Well, you know, countywide we’re down almost 40% and it’s – definitely varies by – from neighborhood to neighborhood. You know, it really comes down to the different prices ranges so at the bottom end of the market, so the first-time homebuyer market, you know, I’d say in that market we’re relatively close to the bottom if not at the bottom, we’re sort of bouncing around the bottom. Those prices have got down, you know, most of the market is, frankly, down below replacement value so you couldn’t build most of the homes that are on the market for what they’re selling for. As you go up in price range, those homes have taken less of a hit and so in those price ranges we’re not necessarily at the bottom. But in general, you know, pricewise we’re about two-thirds from the bottom and we’re timewise about two-thirds from the bottom. So if you look at the market as a kind of a rollercoaster here in San Diego County that goes up and down over the last 40, 50 years, we’re probably two-thirds of the way down to the bottom. And like everything, it varies from market to market and neighborhood to neighborhood which is why, when you talk about national numbers, it’s kind of ridiculous because it’s like saying the average temperature in the United States yesterday was 60 degrees. If you’re in Death Valley and it’s 110, that means nothing.
ST JOHN: It doesn’t tell you anything.
BATTIATA: So it varies from market to market.
ST JOHN: So, Dr. Lea, would you agree with that? That we’re only two-thirds of the way to the bottom?
DR. LEA: I think that we may be a little closer to the bottom than that but it’s just a big unknown out there with regard to two supply factors that Matt has alluded to. One is the fact that we have all these houses in some stage of default and foreclosure that are eventually going to come on the market. And, secondly, there’s kind of a pent-up supply, if you will, people that would’ve sold, they would’ve traded up, traded down, moved, that are locked in and at some point in time a lot of those houses are going to come onto the market and so we aren’t building new houses, so in that regard, you know, that’s the one positive in this from the price standpoint but I definitely think we have further down to go.
ST JOHN: So 888-895-5727 is the number to call if you’d like to ask any questions of Dr. Mike Lea, director of SDSU's Corky McMillin Center for Real Estate, and Matt Battiata, CEO of Battiata Real Estate Group. So, Dr. Lea, what advice would you give to people who are actually poised to buy, who are looking to buy right now?
DR. LEA: Well, I’d say don’t try to time the market. If you’re looking at this as a significant time that you want to spend in a particular location, then, you know, prices may go down somewhat further but over a 5 to 10 year time period I wouldn’t worry about the fact that they are going to go down in the next year or two and I’d look at the fact that, A, can you afford it? B, is this where you want to live? And, C, the fact that if you can qualify for a loan, which is a big if these days…
ST JOHN: Umm-hmm.
DR. LEA: …that this is going to be a very good time from the standpoint of your mortgage rate.
ST JOHN: But what about if you are an investor, in fact, and you are attempting to time the market which, you know, that’s where a lot of the activity has been.
DR. LEA: Well, I think you have to look at it either as I’m in this to get rental income and, as a consequence, can I get a positive cash flow if I buy and rent this house out? Am I willing to spend the time and money to maintain and upkeep it? For that particular person, again, it’s a medium term play. But if you’re a flipper, you think you’re going to get in and get out within three to six months, good luck.
ST JOHN: Umm-hmm. So, Matt, interest rates are at an historic low. I mean, they’re amazingly low. So what kind of opportunity does that present for people who are looking to buy for the first time or moving up to a nicer property?
BATTIATA: Well, it’s a huge opportunity and I think you’re right in phasing the question the way you did to investors and people that are going to buy and stay awhile. You know, for an investor who’s going to flip, you’ve got to be really, really careful because it is a – it’s a difficult market. But for a first time buyer or a trade-up buyer, it’s – you have unbelievably low interest rates that won’t be around forever obviously, and even if the market – you know, you’re going to stay awhile and the market’s down at the bottom, it’s not that big of an issue. It really – I mean, you know, anybody that wants a roof over their head, and for the first time buyers out there, again, you know, for now you can still – they can still do FHA loans where they only have to put three and a half percent down. I don’t know how long the government’s going to be able to keep buying up these loans but I think they’re going to do it for the foreseeable future. And so the big issue that we’ve always had in San Diego County is that it’s been unaffordable.
ST JOHN: Umm-hmm.
BATTIATA: Well, with prices down, you know, 40 to 50% in a lot of areas, you know, that home that a few years ago was $700,000 is now $350,000 or $400,000 and that’s a big difference. And when you add that to the interest rates, you know, the fact that we’re not at the bottom of the market does not mean that people, you know, should not necessarily go out and buy.
ST JOHN: Well, speaking of interest rates, we have Ralph on the line from El Cajon with a question. Ralph, thanks for calling. Go ahead.
RALPH (Caller, El Cajon): Hi, good morning. Simple question, guys. How low do you think the traditional 30 rate – 30-year fixed rate mortgage loans rates will get before this whole mess is over?
ST JOHN: There’s a bit of – sort of smiling here in the studio. I guess it’s a – let’s make it Matt.
BATTIATA: Yeah, I’d say you’re looking at it right now.
DR. LEA: I think you’re close to the bottom. I think the one variable out there is the ten-year Treasury rate which is the benchmark rate that mortgage – long term mortgage rates are set at. That’s been actually falling until recently it started to go back up again. It could move down a little bit but we’re close to the bottom.
ST JOHN: So now, Dr. Lea, isn’t there a potential downside to these low interest rates that are available right now? What’s the risks associated with such a low interest rate?
DR. LEA: Well, there’s a major risk for the holders or investors in the loans that are being produced with these low interest rates. And that is that when rates start to rise, and they ultimately will, they’re not going to stay at this level forever, then there are potential losses that banks or investors in mortgage securities are going to have, including our federal reserve, which is sitting on about one and a half trillion or so of mortgage securities, so how you manage that risk is probably the biggest downside.
ST JOHN: Okay, we have Greg on the line with a question. Greg is in San Diego. Thank you for calling, Greg. Go ahead with your question.
GREG (Caller, San Diego): Yeah, thank you for taking my call. I am in an interesting situation here. We bought a property six years ago for $467. It went down to $224. Out in Eastlake. I couldn’t afford it after the five-year market with an interest only. The payments skyrocketed. So about five months now, we haven’t paid anything and that means nothing on the first, nothing on the second, HOA was just way too much money. So I’m working with the real estate agent and also the investment company who was involved in the loan. They’re trying to do a loan modification for me but now I received a letter from HOA sending us to court. So we’re about to go to this court hearing and according to the real estate agent they said three things are going to happen. If you foreclose, everybody loses. If you short sale, second bank won’t receive any money and what happens to HOA and everybody else, who knows? Or the third option, do a loan modification, which is preferably what I’m trying to do, but then we have all these back payments that have to be caught up and I don’t even think – I don’t even know how to go about it, so I just want comments from the experts.
ST JOHN: Yes. Greg, thanks for the call. So, Matt, what would your advice be?
BATTIATA: My advice would to (sic) to do a short sale. That’s a textbook example case of a short sale scenario. In a short sale, you know, both your first and your second will agree to settle the debt on your property and then you also can get the HOA to settle the debt. You’re going to need money to do that but in a real estate transaction, the money comes from the buyer because they’re the ones coming in buying the property. And so what you can do, what your agent can do with your bank, is slice and dice the offer so that you can get money to pay off the first, get money to settle the second, and then get money to settle the debt to the HOA. And that’s your – that is your best opportunity, so if you’ve already – already working with an agent, if that agent is experienced in doing short sales, I think they should be guiding you towards doing a short sale because that – you’re in an perfect example for a short sale making a lot of sense.
ST JOHN: So this is a big decision for Greg. Dr. Lea, what would you say?
DR. LEA: I’d pretty much agree with Matt. I think the only hope on loan modification is if the lender would substantially reduce the principle but he’s indicated that there’s complications with that because you have a second lien holder and a second lien holder doesn’t want to be wiped out and so it has control, to some degree, over the transaction as well as the HOA. So without a significant principle write down on the first and extinguishing the second, it sounds like a loan modification’s unlikely.
BATTIATA: Can I make one comment about…
ST JOHN: Sure.
BATTIATA: …just about loan modifications. I just want to make a comment that what I hear on a daily basis, I get a lot of calls from people that are trying to do loan modifications. The reality of loan mods is that the banks have no interest in modifying people’s loans. So, number one, you do not need to pay any outside company. It’s now illegal for outside companies to charge upfront for loan modifications and that includes law firms. But the reality with loan mods is 95% of the people that apply for them are not – do not qualify because the banks don’t want to do them, number one, and, number two, of the people that do qualify, it’s typically a 10 to 20% reduction in your payment is what you get. You won’t get a principle reduction. You also will not get a major reduction in your payments, so if your payment is $3,000 a month, reality is they might drop that down to $2500 or $2600 and in most cases what they do is they take that, say, $400 or $500 a month that you’re saving and they defer it so it goes to the back end of your loan. It just turns into a neg am loan. So, you know, the big issue that we have in the market right now is that the banks don’t tell people. They don’t give people realistic expectations about what they’re going to gain from a loan mod. And so I find sometimes the calls that I get, the people that have actually qualified for a loan modification, the small percentage, when they find out what they actually get, they’re more upset than the people that were denied.
ST JOHN: Hmm.
BATTIATA: Because they’ve wasted a year or longer going back and forth with the banks only to find out that they’re going to save $300 a month, which doesn’t do them any good.
ST JOHN: Okay, Greg, well I hope that’s been help, and good luck to you. And we’re going to take a quick break here but we’ll be right back with more of your calls at 888-895-5727 with Dr. Michael Lea of SDSU’s Corky McMillin Center Real Estate and Matt Battiata of Battiata Real Estate Group.
ST JOHN: And you’re back on These Days with me, Alison St John sitting in for Maureen Cavanaugh, Dr. Mike Lea of SDSU and Matt Battiata, CEO of Battiata Real Estate Group. And we were just talking a little bit about the different options faced by people who basically can’t hold onto their homes. And I wanted to know why it is that it’s a better option to get a short sale than a loan modification. I mean, I’m sure there are many people who really want to stay in their homes and would do anything just to get their loan modified to where they could afford it. Why is it that it’s so much better for the banks to offer them a short sale, Dr. Lea?
DR. LEA: Well, it’s getting the money now as opposed to having an uncertain cash flow coming in over time. The uncertainty is due to the fact that a lot of these people, even if they qualify for a loan modification, still have very high back end ratios. After you’ve reduced their what we call the front end ratio, their housing expense-to-income down to 31%, which is the goal of loan modifications, their back end ratio, after modification, is still over 60%.
ST JOHN: What is the back end modifi…
DR. LEA: That is all your debts service.
ST JOHN: Ah, yes. Okay.
DR. LEA: It’s housing cost plus your auto, student, credit card debt, everything like that.
ST JOHN: Umm-hmm. Just too much debt in your life. Umm-hmm.
DR. LEA: And so there’s just too much debt and the people are very shaky even if they do qualify.
ST JOHN: How many people in San Diego have negative equity or are behind in their mortgage right now, Dr. Lea, do you know?
DR. LEA: Well, in terms of negative equity, the numbers I’ve seen suggest about 25%, which is comparable to a lot of hard hit places in the country.
ST JOHN: Graham is in Carlsbad and he also has a question for you. Graham, thanks for calling. Go ahead.
GRAHAM (Caller, Carlsbad): Yes, thank you. I went through a short sale recently and now I’m in the process of trying to get my credit sorted out and I noticed that the way things are being reported is that the short sale doesn’t look like it’s going to clear off of my credit until like 2016 and I was under the impression it was a much shorter time frame for a short sale relative to a foreclosure. But in doing some research online, it’s not really clear to me at this point whether or not a short sale was any more beneficial than a foreclosure in terms of its credit implications. And I’d just like some feedback from the panel on that if you…
ST JOHN: Matt?
BATTIATA: Yeah, that’s a great question. There’s two ways that a short sale impacts your credit and it is much better on your credit, by the way, than a – for example than a foreclosure. The short sale’s reported on your credit as debt settled for less than the amount owed. That has an impact on your credit and it does vary for everyone depending on how established your credit is in the first place. So if you have good credit that you’ve established over the years, it has less of an impact, in other words, I’ve seen it impact people’s credit 20, 30 points. I’ve seen it impact people’s credit, you know, 80 to 100 points. The other part of how a short sale impacts your credit is the missed payments because a lot of people, when they do a short sale, stop making their payments either because they can’t afford it or, in some cases, because they just figure what’s the point? I’m going to stop putting good money after bad. Again, that can have an impact on your credit. A small impact if you have good, you know, good credit, much more of an impact if you have bad credit. The point of the story, though, is that in Graham’s case, yes, it’ll stay on your credit but it’s only a 24- month waiting period after you do a short sale before you can buy again. And that’s only if you want to get a government insured loan. So an FHA, a VA, you know, Fannie Mae, Freddie Mac insured loan. We see a lot of people doing short sales buying in less than a year after doing a short sale, getting a conventional loan or a loan from their credit union so…
ST JOHN: Sort of something they can afford more and the price – I see.
BATTIATA: Yeah, well, it doesn’t mean you – It all is a function of your FICO scores. So the fact that you have a short sale, it’s a two-year waiting period if you want to go get a government-insured loan because Fannie Mae and Freddie Mac have imposed a sort of arbitrary 24-month waiting period after you do a short sale. They call it a seasoning period. But that doesn’t exist if, you know, for conventional loans or loans that are not backed by Fannie and Freddie…
ST JOHN: Umm…
BATTIATA: …it’s just a function of your FICO scores. So I’ll give you an ex – one quick example. I’ve seen people miss six months of payments and do a short sale and they have a FICO score still in the high sixes. I’ve seen people miss two payments, you know, maybe they were a young couple right out of college, I’ve seen them miss two payments and their FICO score drops 100 points. The bottom line either way is that you can repair your credit. It’s not an issue of, Graham, having to get that short sale off of your credit it’s simply an issue of building your FICO score back up.
ST JOHN: Okay, Graham, hope that’s helpful. At least you know that the short sale was better than the foreclosure. Tom is in Rancho Bernardo. Tom, go ahead with your question.
TOM (Caller, Rancho Bernardo): Hello. Thanks for taking my call. A similar situation to Graham, except we actually went through the foreclosure. We tried to do the modification and then the short sale route and nobody was having any of it and we ended up going into foreclosure. Well, now we’re getting at a point where we do have some money to put back into a down payment and I think our credit score’s in the mid-sixes right now.
ST JOHN: Not bad.
TOM: I’m wondering how difficult is it going to be to qualify for a home loan at this point?
ST JOHN: Matt.
BATTIATA: Well, it – I’m not sure – Is he still on the line? How long ago did he have the foreclosure? Is he there?
ST JOHN: Tom, are you still there?
TOM: Yes, I am still there.
BATTIATA: When did you have your foreclosure, Tom? When did it…
BATTIATA: 2009, okay.
BATTIATA: Well, depending on your situation, what I would recommend you do is, number one, you want to talk to a good mortgage broker who can help you and they can do something – They can rescore your credit and get your FICO score up. It varies depending on the lender and the loan program you go through as far as how soon you can buy, you know, get another purchase loan. Again, it’s going to be longer for a government insured loan. But depending on your situation, and you’re going to have to write, you know, explanation letters and so forth—it’s not easy—but, again, we see people buying in two to three years after a foreclosure. So even a foreclosure, while it’s worse than a short sale, but even with a foreclosure, it doesn’t mean that you’re locked out of the market for seven years. Most cases, what I see is they say between three and five.
ST JOHN: Okay. Tom, hopefully, that’s helpful.
TOM: Thank you.
ST JOHN: There’s a Senate Bill 931, I believe, that, Matt, you wanted to talk about which affects short sales, since we’re talking about short sales. What would that do for people who are looking at a short sale?
BATTIATA: SB-931 just passed completely unopposed in the California Senate and it’s now going to go to the governor’s desk for his signature. Basically, what it does, it prevents first liens in California from pursuing any deficiency after a short sale. So, you know, it – when we do a short sale, one of the things we’re doing, the main thing we’re doing, is negotiating with the lender to settle the debt, which means they’re not going to pursue the seller for any deficiency. The seller’s not signing a promissory note. It’s just a done deal. The seller doesn’t get any money out of the sale because there’s no equity. The bank pays the selling cost…
ST JOHN: But you walk away.
BATTIATA: …and you walk away with a clean slate. The majority of the time we’re able to get the banks to agree to that but in some cases the banks will not agree to it and they say we’re going to reserve the right to pursue the deficiency. SB-931 prevents a bank first lien in California from pursuing any deficiency and that, I think, will make short sales a lot more appealing of an option for people that are upside down because in some cases – California’s a one-action state. So if you only have a first lien and your bank says we’re not going to settle the debt, we want to go after you, the seller rightly would say, well, I think I’d rather just let it go to foreclosure.
ST JOHN: Umm-hmm.
BATTIATA: Because all they can do in a foreclosure is take the property back but they can’t go after me.
ST JOHN: Umm-hmm.
BATTIATA: So that’s the purpose of SB-931. And Schwarzenegger, I don’t think he has to sign it until, oh, I want to say – Well, it’ll go into effect January first but it’s expected that he’ll sign it.
ST JOHN: And would that affect people with seconds less, no?
BATTIATA: It doesn’t affect the second.
ST JOHN: Okay.
BATTIATA: Which is why when you do the short sale, you have to get – And I’ll tell you something else, is that we don’t typically see first liens in California pursuing deficiencies.
ST JOHN: Aha.
BATTIATA: It’s the seconds that normally go after people after a short sale, unless you get what we call a full and final satisfaction. So for anybody out there that’s doing or contemplating a short sale, you need to make sure if you have a recourse loan, in other words if your loan, if it wasn’t a purchase money loan on your second, you need to make sure you get in writing from your lender saying we are not going to pursue – we’re going to settle this as a full and final satisfaction and not pursue the seller.
ST JOHN: Dr. Lea.
DR. LEA: But I want to point out that that, while understandable in the short run, has potentially negative consequences in the long term because lenders’ inability to pursue deficiency judgments, effectively making all loans non-recourse, adds to the risk for lenders and it terms of future qualification and also mortgage rates is going to have an impact.
ST JOHN: Okay, so we’ve just got a few minutes left. I would like you to sort of look into your crystal balls a bit and say do you think that San Diego will come out of this housing crisis sooner than the rest of the nation or lag behind?
DR. LEA: You know, it’s similar to Matt’s earlier comment about average temperature, is that there are some parts of the country that are doing better than others. We’re certainly doing a lot better than the inland empire, Arizona, Florida, etcetera, but on the same token not as well as San Francisco, Washington, D.C. So I think we still have another year to year and a half where we’re going to bounce around on the bottom, probably have a decline in house prices, before we really stabilize the situation.
ST JOHN: And, Matt, you’re sometimes a little more negative? Some might say really…
BATTIATA: Well, no, in this case I’m actually, I think, a little bit more optimistic…
ST JOHN: Okay.
BATTIATA: …in that. You know, every downturn the tendency is for everyone to think, you know, this time is different. It’s different this time. And so a lot of people are saying right now, you know, well, once we hit bottom, you know, it’s not going to come back the way it was. What I think you’re going to see in San Diego is you’re going to see we’re going to bottom out in the next 12 to 24 months and then the market’s going to become, you know, much, much more affordable than it’s been in a long, long time. And I think you’re going to see a very sustainable comeback of this market because obviously it’s San Diego, it’s a great place to live and a lot of people want to be here and our big issue was affordability. And we’re fixing that problem with this huge downturn. And so once we do get to the bottom, I think you’re going to see a rather sustainable comeback and I think it’s going to be a really positive thing for the San Diego economy.
ST JOHN: I mean, after all, it did take seven years for the market after the 1991 drop in house prices. It took a while for the prices to come back.
DR. LEA: And we’re still seeing population growth and we’re not building any new houses, so ultimately that demand has to be satisfied so I would agree with Matt that once we do clear out this shadow inventory and get the market stabilized, that we are going to be in a good, sustainable growth.
ST JOHN: And the fact is that with such a low building permit rate right now, if the shortage is still in place when the market turns around, could it turn around pretty rapidly?
BATTIATA: I think it could. You know, the other – it’s not even an issue of the building permits. There’s really – We’re really out of land. There’s no more land left, for the most part, coastal anyway, to – for big developments. So what you’re going to start seeing is more and more infill where you’re having to, you know, people are buying an older home and knocking it down and building a new one. So, you know, they’ve said that in a long time in San Diego, people – they always say, well, we’re not, you know, they’re not making any more land and so forth. We’re finally at the point where most of the large plots are used up.
ST JOHN: So what should people be keeping their eyes on? Which particular indices should people be looking at over the next few months, Matt?
BATTIATA: They, you know, the – For me, the biggest positive for the market right now is the fact that the banks have finally learned that they lose a lot less money when they do a short sale versus a foreclosure. And for that reason, notice of defaults and notice of trustee sales are both down dramatically. That was the only positive news that came out recently about this year compared to last year or this July compared to last July, is that NODs and notice of trustee sales are down because the banks are – they’ve learned that it’s in their best interest to do short sales and short sales are much easier on the market and on prices than foreclosures.
ST JOHN: Great. Well, I’d like to thank both of you very much for joining us. Dr. Mike Lea, director of SDSU's Corky McMillin Center for Real Estate. Thanks for being here, Dr. Lea.
DR. LEA: Thank you, Alison.
ST JOHN: And Matt Battiata, CEO of Battiata Real Estate Group, always great to have you here.
BATTIATA: Thank you.
ST JOHN: Stay with us. Coming up in the next hour of These Days, we’ll be talking about the situation down south of the border in Tijuana.