Friday, January 29, 2010
San Diego was one of only four large metro areas in the nation to see an increase in home prices late last year. Why is the local housing market improving in San Diego, while home prices are declining around the rest of the country?
GLORIA PENNER (Host): I’m Gloria Penner. I’m joined by the editors at the roundtable These Days in San Diego. Today, we’ll talk about the state of the shaky housing market, the state of the gridlocked union, and the California Supreme Court decision that dismissed conflict of interest charges against five local pension board members. The editors with me today are Kent Davy, editor of the North County Times. Kent, thanks for taking the drive down the coast.
KENT DAVY (Editor, North County Times): Good morning, Gloria.
PENNER: Good morning. Joe Garren, editor of the San Diego Daily Transcript. I’m glad you found us again, Joe. It’s good to see you.
JOE GARREN (Editor, San Diego Daily Transcript): Oh, good morning, Gloria. It’s great to be here.
PENNER: And John Warren, editor and publisher of San Diego Voice and & Viewpoint. Always a pleasure, John.
JOHN WARREN (Editor/Publisher, San Diego Voice & Viewpoint): Thank you, Gloria.
PENNER: And our number, if you’d like to join this lovely group this morning, is 1-888-895-5727, that’s 895-KPBS. Well, the prevailing wisdom is that the nation’s economy will suffer if the housing market doesn’t show signs of recovering. Unfortunately, the latest national figures don’t look good with both new home sales and existing home sales in December falling. But, Kent, we’ll want to talk about the local housing situation, but first let’s look at what’s happening in the nation. Sales were down in December. How worrisome was that drop?
DAVY: Well, it is worrisome on a couple of counts, I think, because, first of all, there – it’s how much of it was housing spurred by federal programs to kind of boost that – whose boost housing sales, a question of will those tax credits and continue and keep punching through (sic). The other piece of it that I think is even more worrisome, and I’ve not seen it widely remarked on, it’s something that my reporter, Eric Wolff, pointed out to me yesterday, and that is the number of delinquencies at Fannie Mae and Freddie Mac have really, really spiked in the last several months. The gain from October to November of about 5%, so if you look at a graph of it, it looks like a hockey stick, like the climate data. That means – and what I’m talking about is the number of houses that – and that – or mortgages that Freddie Mae (sic), Fannie – Fattie Mac (sic) – Freddie Mac and Fannie Mae, get my words straight…
PENNER: Got it.
DAVY: …have that are 90 days or more delinquent. It’s a huge number sitting out there and that’s, I think, the real threat.
PENNER: Now, let – just define for our listeners that Fannie Mae and Freddie Mac are really important players in this because…?
DAVY: They’re the organizations, kind of public corporations, that end up with all the paper that come out of mortgages that are turned. You know, it’s the FHA loans, that sort of paper that’s sitting back there. And they have been pushing off millions, billions of dollars worth of paper back into the Fed. If the Fed stops taking that paper, toxic paper, then all of a sudden, you’ve got the danger of the credit market freezing up again. So…
PENNER: And people can’t get loans to buy…
DAVY: …so the whole thing’s very, very fragile, I think.
PENNER: Okay, now, Joe, you’re with the Daily Transcript so I’m going to throw, you know, the economics questions to you. Aside from persistent unemployment, which we know that we have, are there any other factors contributing to the drop in home prices and the drop in sales?
GARREN: Well, I think one thing is that it shows that people are – do not have faith that the economy is going to recover. They’re looking long term investments and they think, do I want to get into a house or make a change in my financial situation right now? I think that that leap is – what it’s telling us, one of the things, you know, that people are concerned about holding onto their jobs and so that’s important and then finding loans. Being able to qualify for the loans is very difficult right now. The people are – It used to be, if you got it for, you know, a much lower interest – or the interest rates are nice and low now but you didn’t have to have as much to qualify, and now the banks are asking for better qualification numbers, 20% down at least, sometimes 10% down if they’re lucky.
PENNER: Well, before I go to John Warren on this, I want to ask our listeners this question. This morning I read in the Wall Street Journal that the gross national product has actually risen considerably in the last quarter of 2009. It went up to – I’m sorry, it’s the GDP, that’s not – that’s the gross what?
GARREN: Domestic product.
PENNER: Domestic product, it went up 5.7% in the last quarter of 2009. It’s showing that something good happened in the economy at that point. And so one would think, John, and I’m going to ask our listeners first, are you starting to feel as though we are on the verge of recovery? That we’re not going into a double-dip recession? And that perhaps this is a time to reevaluate your thinking and start thinking more positively, which might include the idea of considering buying a home. Our number is 1-888-895-5727, 895-KPBS. John, am I being too optimistic?
WARREN: Well, I think the answer to your question is as varied as the people that you might speak with and it’s also varied because of the country. The same situation does not exist in each segment of the country. Yes, unemployment is up. Housing sales are down in many places. And yet in San Diego, sales are up above other areas because there is a shortage in terms of the market. This last quarter you make reference to, I think there are two things there, one being the economic stimulus manifestations that are coming online and, number two, the housing credit that was there that people were rushing to make by December and then that credit was extended. And so I think those two things had a lot to do with the gross domestic product surge going up because we don’t see signs of banks making more loans or being more willing to make loans and there’s still some resistance to financing many of these things. So there is a degree of confidence out there but it depends on who you talk with.
PENNER: Well, you know, it’s interesting to me, Kent, that what John referred to, San Diego was one of only four markets to show an increase in housing prices while 20 other metro areas went down. So does it appear as though San Diego is starting its own recovery?
DAVY: You hope so. We’ve – In the Case Shiller Index, we’ve posted, I think, six months now of increasing month over month, finally got a year over year gain in that. And Case Shiller is an index that compares same properties that get sold at one point in time and are resold. So it’s a fairly accurate measure of a median price. The – I think from talking to some realtors, what’s gone on in the market a lot, there’s been a lot of money move in for people who are buying, cash buyers, in the last quarter, coming in, buying particularly on the low end of the market, presumably for investment purposes or perhaps for flipping down in. I’ve talked to several individual people who have said I’m fully qualified, I have a loan ready, I have gone in, made an offer on the house, and six or eight times have been outbid by a cash offer coming in. That would be an indication of investments. I’ve heard other realtors say, no, that’s yesterday’s news and the market’s already changed and it’s already moving much more aggressively to new buyers.
PENNER: Well, there is a lot of cash around, isn’t there? I mean, people have been unwilling to go into the stock market, they’re worried about that. The interest rates on bank products such as CDs is very, very low. Because of the concern about the state of the health of California, people aren’t willing to buy municipal bonds. So you can see there’s a lot of cash around.
DAVY: And this is a market that got hammered on price. So as price points came way, way down, if you assume that there’s a good chance for price appreciation in the future, it makes it a real good return on investment if you’ve got some cash to put in. That’s why a lot of foreign money came into San Diego.
GARREN: Well, I think, excuse me, realtors are telling us that—and there’s a lot of evidence from what Kent’s saying—that this is the bottom of the market, that the housing prices have stabilized. If you’re looking to buy a house in San Diego County, this is the best time in five years. If you’re looking for to improve, I mean, you know, the, you know, and interest rates are low. This is a, you know, I hate to say it’s a good time to buy a house but if you’re in the market – this is why I think that we’re seeing so much activity here.
PENNER: Kent, talk about the – as an investment rather than a house to live in, though. Isn’t the common wisdom that you really, if you want to buy a house, you shouldn’t buy it as an investment, you should buy it to live in it?
GARREN: Yeah, any investment’s a risk and there’s – if you buy a house, you’re at the same risk as if you’re buying a stock. It could go down. I know when I bought my house, shortly – years ago, it did go down in price but I’ve held it for a long time. But, no, yeah, I think for most people, the vast majority of people, they shouldn’t use real estate as a speculation device to increase their holdings, it’s something that you buy and you hope to live in for ten years, fifteen, twenty years at least.
PENNER: Okay, let’s go to the phones and hear what our listeners have to say about all this, and we’ll start with Jamie in San Diego. Jamie, you’re on with the editors.
JAMIE (Caller, San Diego): Hello.
JAMIE: I was commenting on – your question was about risk assessment for buyers in particular in the market today.
JAMIE: My opinion and position is that it’s very hard to make a risk assessment now because of the massive government intervention in the market. We don’t know if there’s going to be a second extension of the tax credit or how long the – what economists say are artificially low interest rates are going to remain at this level. The problem is not the market itself. If we had just a free market working out right now, I would be, you know, if prices really did seem to be stabilizing, I’d be very happy to invest in the market but the problem is we don’t know what the government’s going to do and those interventions are distorting risk assessments by everybody.
PENNER: Okay, thank you. And I think what Jamie is referring to, John, is the fact that there is a tax credit that’s still on the books. It apparently is going to stay on the books until the end of April now, and that is for first time homebuyers to get an $8000 tax credit. A lot of people see that as federal intervention in the housing market and they’re unsure how long that’s going to last.
WARREN: Well, you got two groups of people out there, especially in San Diego. We talk about, as Kent mentioned, cash offers being made. There are people here with a lot of money and they are not concerned economically as much because they can afford to do whatever it is. It’s just like gas prices, those who have money don’t really care what the prices come to. But we have other factors intervening. On the one hand you have people with a lot of money, then we see situations like the VA where people are qualified, they’re able to go in, folks don’t want to take it because of the inspections. With the FHA, there’re inspections, there’re extra hoops to go through. Well, cash is just to come in, put the money down, close the deal. And all of this is impacting the market. So the $8000 credit is really only of concern to the people at the low end of the tier who are trying to buy. Those at the upper end can afford it and the credit is just icing on the cake but they don’t really care one way or the other.
PENNER: Our number is 1-888-895-5727. If you’d like to join our discussion, we’re talking about the housing market, the fact that prices and sales have dropped nationwide but not in San Diego. In San Diego, we have seen an uptick and Joe Gerren says the market’s bottomed out and this might be the time to buy. One analyst, Kent, says the – he sees the reason as the – for the uptick is the relative shortage of homes for sale. But I wonder about that backlog of distressed homes that the banks haven’t relisted yet for sale. Once those come on the market, might we see prices drop again?
DAVY: I don’t think that’s going to cause the prices to drop. You know, there’s some speculation about how fast the banks are going to move this property back on the market, whether they’re holding it back to keep prices propped up or whether they are just slow in returning the stuff to the market. Over time, San Diego’s natural growth rate is going to continue to put pressure or demand for home starts, for new construction. At some point in time, you’re going to see the building industry here start to get healthy again. I know in North County there’s several new building starts, new homes, relatively small. There’s some proposals of larger projects that are now being debated, like Merriam Mountain, in front of the County, so there is now some pressure to start building new stock or bringing new stock onto the market. So I don’t think the foreclosed stuff is going to really tumble it. I don’t think that’s the threat.
PENNER: Okay, well, thank you for that. There’s lots more to discuss and we are going to come back and talk more about the housing market, specifically in San Diego, and I want to look at that North County area and see what’s developing there. So you are welcome to call us at 1-888-895-5727, and we’ll be back in a moment. This is the Editors Roundtable. I’m Gloria Penner.
PENNER: I’m Gloria Penner and this is the Editors Roundtable. We are talking about the housing market in San Diego where prices seem to be starting to bump up somewhat. And we’re wondering whether we’ve hit the bottom, and if you want to go ahead and buy, this would be the time to buy before we see another spike, although I wonder if a spike is really in our future. With me to talk about this and other issues as well is Joe Garren of the Daily Transcript and John Warren of San Diego Voice & Viewpoint and from the North County Times, we have Kent Davy. So before I get back to you, Kent, on an issue we were just starting to discuss, I want to hear what Joe in Coronado has to say. He’s been waiting for a while. Hey, Joe, you’re on with the editors.
JOE (Caller, Coronado): Oh, thank you. I had a question for Joe, Jim (sic), and Kent. And my question is do they feel that perhaps some of the uptick in our San Diego housing market may be due to the large amount of military people we have here and the action these people have in getting a good deal on financing homes with low down and good interest rates.
PENNER: Well, thank you very much, Joe. You sort of – you must’ve read my mind. I was thinking about that. So, Kent, will you respond to Joe, please?
DAVY: I don’t think the uptick has to do with the VA-eligible buyer or the active duty people around although, at least in the case of active duty people, they certainly have good, steady paychecks to rely on so they become a prospect for good buyers. Their problem, of course, is they rotate out, typically, after a two, three year assignment. That probably weighs against buying decisions. The VA buying issue is a more interesting one. Eric Wolff’s written about it just in the last week. What he has found out anecdotally—and understand anecdotal evidence doesn’t prove the case but it merely points in a direction—is that VA buyers – well-qualified VA-eligible buyers are having a tough time because the VA puts a number of set of restrictions on inspections and it pushes the inspection cost onto the seller. It puts escrow fees, if the house falls out, back on the seller so that it doesn’t assume any risk. So we are being told by some people that VA buyers are being told by sellers, no, I’m not interested in a VA buyer. And they’re getting pushed down in favor of other buyers.
PENNER: How can the VA, which is supposed to be working to benefit our veterans, establish rules and procedures that work against those veterans?
DAVY: Well, I think that, you know, it’s a matter of – and from – I – We didn’t talk to any VA people. They didn’t call back for Eric’s story so I can’t speak with knowledge from their point of view. I assume that they are attempting to protect themselves, from their point of view. They don’t want their – the people that they’re loaning money to to go into houses that have got defects in them and find themselves on the wrong side because of a piece of defective housing for some reason, so they put stringent restrictions on. They don’t want to be left holding the bag, or the government doesn’t want to be left holding the bag, if the house falls out of escrow. So those are – I mean, those are some restrictions that you could, from a point of view, argue, well, that’s a reasonable restriction. Well, what it does is drag out the process of actually getting that loan done and through escrow, makes it much harder for the buyer, the VA buyer, to actually get it done.
WARREN: Well, it’s not just the VA. I mean, FHA, Section 8, everything that the government is involved in in terms of housing has a standard, and the standard is not only to protect the government but is also to protect the person who’s the recipient. And so these standards here, like in one case that we looked at where the family actually went in and made repairs and did things to the house to help it qualify, are all people unable to do those kinds of things. But it goes to the market that the two factors working in the market, number one, banks are sitting on properties, foreclosures, toxic assets, as we call them. They’re not willing to put money up at this point, so that leaves the door open for the private investors. And the people who are selling and the real estate brokers, they want to get the quickest dollar they can, as much as they can, and close as soon as they can. And that’s something the government just can’t seem to get around.
GARREN: Another thing it shows is the market we’re in. This is – it shows that it’s a seller’s market. If it’s a – a seller has choices who he can sell to then he’s going to push the VA person to the side. If the buyer – if the seller is desperate and he’s having trouble attracting buyers, the VA, they might be more willing to consider those.
PENNER: Joe, isn’t it better, really, for your lender to be more careful, let’s say, than the history of lending that has gotten us into this mess in the first place? You know, people who would – lenders who would lend to anybody and even push potential sellers into taking out loans so that they could get their bonus or their commission or whatever they got.
GARREN: Indeed, this is protecting the people who are buying the house. It keeps the people who are – military people are not historically well off financially and they can’t afford to take a mistake – make a mistake in the world of real estate and buy – you know, this major investment and get saddled with a house that they have all sorts of problems with so the VA is helping them in that regard.
PENNER: I’m wondering, you know, in all the foreclosures and all the defaults that we’ve been reading about, whether there are – is a large number of military that’s involved though, whether it’s mostly civilian purchases. Do we have any idea, Joe?
GARREN: I do not. I don’t know if they even break it out in those type of numbers. I don’t think they do.
PENNER: It would be interesting to know that. Let’s take one more call on this, and I want to thank our last caller. Thank you so much, Joe. Jay in Rancho Penasquitos is with us. Hey, Jay, you’re our last caller.
JAY (Caller, Rancho Penasquitos): Gloria, what a wonderful lead in you had there. Thanks for that question. The (audio dropout) observation is that we’re never going to return to the amazing sales of just (audio dropout) years ago, not even close to that because the median income of the people in the U.S., and California in particular, is not supportive of a $500,000, $600,000 home. And you get – Or even of the one or two bedroom condo that’s the $350,000 condo, the median income of the folks that are – you just can’t support it unless you lie about what your incomes are (audio dropout) going on.
JAY: And so I don’t think you’re going to have a big increase in this little uptick, it’s just a tiny uptick and it’ll not be much more than that.
PENNER: Okay, thank you very much, Jay. So things have changed…
DAVY: In a…
PENNER: …have they, Kent?
DAVY: In a sense because what happened to the housing market in the last decade in San Diego prior to the crash was truly a housing bubble. It was people pushing money in on a speculative basis, looking at returns based on capital appreciation. That’s not the norm for housing markets generally. Houses as a – tend to be a place that you buy so that you can live in and hope that you don’t lose a lot of money and maybe it appreciates over the course of your tenure in the house, over the long term.
PENNER: Okay, very, very good. Thank you very much, gentlemen. Let’s move on. We have lots to talk about today.