Have Residential And Commercial Markets Hit Bottom?
Tuesday, May 11, 2010
Home prices in San Diego are rising at a higher rate than just about every other market in the nation. Is this a sign the local real estate market is stabilizing? Plus, why is the commercial market continuing to struggle? We discuss the latest news on the residential and commercial real estate markets.
MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh, and you're listening to These Days on KPBS. The newest figures show that homes values in San Diego have increased overall almost 4% from last year. And that figure actually leads the nation in a year-to-year price comparison. Other reports say that federal and state tax credit programs have stimulated the housing market. All of that is good news. But in this recession era real estate market there always seems to be a downside to good news: like a lack of inventory or tight credit, and commercial real estate hitting rock bottom.
So what does all this mean if you are thinking of buying or selling a home in San Diego this spring and summer? What does it mean to the commercial health of downtown San Diego or to your local shopping mall? Joining us for a local real estate market update are my guests. Matt Battiata, CEO of the Battiata Real Estate Group. And, Matt, welcome back.
MATT BATTIATA (CEO, Battiata Real Estate Group): Good morning. Thank you.
CAVANAUGH: Gary London, a real estate economist with the London Group Realty Advisors. Gary, welcome back to you.
GARY LONDON (Real Estate Economist, London Group Realty Advisors): Thank you, Maureen.
CAVANAUGH: And we’d like to invite our listeners to join the conversation. What are the major issues for you if you’re thinking about buying or selling real estate in the coming months? Are you seeing more houses for sale? Are you seeing more empty commercial real estate in your neighborhood? Give us a call with your questions or comments. Our number is 1-888-895-5727, 1-888-895-KPBS. Or if you’re listening online, you can join our live chat. Let’s start with the residential market. The U-T reported yesterday that when compared to the previous year, local home prices rose at a faster rate in March than in any other market in the nation. So, Matt, I’m wondering, what does that tell us about the local market?
BATTIATA: It tells us that the local market has a very constricted supply of homes at the moment. There are…
CAVANAUGH: Pushing home prices up.
BATTIATA: Yeah, real estate supply and demand. So we do – There’s always a demand in San Diego County. When the supply is low, it pushes up prices and so that’s why we’ve seen a couple of months of positive news. You know, right now in San Diego County, there’s roughly 19,000 homes for sale. Now when you back out, about 30% of those are short sales where the homes – where offers have been submitted to the bank and they’re in what we call contingent status, which means they’re kind of tied up. You can’t really go out and buy those homes. So when you back out that number, you get down to, you know, 13,000 or 14,000 actual homes on the market. That’s pretty low inventory for San Diego County. We had gotten up as high as 30,000 in this market. So the inventory’s relatively low. I think that’s going to be a brief phenomenon. I think that inventory’s going to go up but at the moment you’ve got a limited supply and that’s why we’re seeing multiple offers and that’s why prices have started to tick up a little bit.
CAVANAUGH: Gary, what’s your take on this? Is the San Diego housing market stabilizing in some way?
LONDON: I think it is stabilizing and I think that the fact that the inventory is low is indicative of essentially the end of a recession year and the beginning of a recovery phase. Not to say that the recovery is going to be, you know, around the corner, it’s going to be a long, brutal, you know, work up to a more normal market, but I think that just sort of piggybacking on what Matt has said, we are going to see more inventory as more prospective sellers start to see a more normalizing market and begin to list their homes again. What has mostly characterized the housing market of the last several years is a low level of resale inventory. And that low level resale inventory continues to perpetuate the market but when we see normalization again, we’re going to see more larger inventories, which will, in itself, create a more stable market. I think we’ll bring in more buyers and ultimately have the effect of bidding up prices.
CAVANAUGH: Am I right, Gary, in thinking that you think that the local real estate market has bottomed out and is on its way back up?
LONDON: I do, but I want to emphasize that this is not an event that’s going to be over, you know, in two months from now. It was – it’s been a long four years of downturn in the marketplace and I think it’s going to be probably – perhaps that much time may be a little bit less before we see what I would consider more – a more normal market. And we’ll see the more – you know, the indice of a more normal market will be both price stability and gradual increase coupled with the fact that we’ll see about double the amount of listings we see in the market today.
CAVANAUGH: And would you share that opinion, Matt?
BATTIATA: I, you know, I would temper what Gary said with one observation, which is that you have a tremendous number of people in San Diego County who owe at peak levels. That’s really the biggest factor. So if you look at the real estate market in San Diego as kind of like a rollercoaster, which it’s been for the last, you know, 40 years that I’ve charted backwards, so, you know, we have these really high peaks and then these dramatic down, you know, down to the bottom and these troughs. I think we’re about two-thirds of the way down. The issue is that you have a huge number of people that, again, owe at those peak levels because they either bought at the peak, say between 2004 and 2006, or maybe they bought in 2001 but they – and they put very little down, by the way, when they bought because the banks encouraged them to do that, or they bought in 2001 or 2002 but then when prices got up to the peak, they pulled out the majority of their equity. So you have a huge number of people who owe at those peak levels. If for any reason those people need to sell their homes, okay, if they get a job transfer, if they lose their job, if they get divorced, for whatever reason they can’t afford their payments, if for any reason they need to sell, until prices get all the way down to the bottom and then all the way back up to those peak levels, if for any reason they need to sell, they’re upside down and they’re going to be, worst case, a foreclosure, and best case, a short sale. And so for that reason, when you have a – when the majority of the homes on the market—or I should temper that with saying when a good percentage, say, 30% of the homes on the market are what we would call distress sales, they have to sell, unfortunately, it does put downward pressure on the market. And, to me, that’s the biggest indicator of what Gary said, that, you know, it is a slow road back and then you add to that the banks still have a huge number of homes that, unfortunately, they’re going to end up foreclosing on and that also puts downward pressure.
LONDON: Here’s the deal, though. Let me just sort of react to that. These people that are in exactly the same situation as Matt has just painted, have simply, over the last few years, elected not to participate in the housing market. And they’ll continue to sit on the sidelines until they see signs of an economic upside and of appreciation or getting back to a level that they can – that they feel like is appropriate…
LONDON: …to transact at some level that will be at non-distress level. Notice, these are non-distress people. The change in now versus when we had this conversation last year is that the economy is in a recovery. And if the economy continues to recover—and there’s, of course, some debate on whether this is a true recovery or a double dip and so forth—but I’m convinced that this is a true recovery. As this economy recovers, then the market starts to open up. And what was defined as distressed last year is now defined as we’re just going to wait and see and wait until the market starts to sort of play out in a more positive way and then these transactions will come up and values will come up. And the other thing, and, you know, I just – I don’t want to make this a – just my own conversation with myself but…
CAVANAUGH: Uh-huh. You sure?
LONDON: …but I have to, you know, I have to add that what’s unique about San Diego is we have, and will continue to have, a perpetual shortage of housing supply relative to demand well into the foreseeable future which will have the ultimate impact of bidding up the price of housing.
CAVANAUGH: Let’s go to the phones. We’re asking people to call in with their real estate questions about buying or selling. What – if they have questions about what they hope or fear the market might be like this spring and summer. Give us a call, 1-888-895-5727 or if you’re listening online, you can join our live chat. Let’s take a phone call now from John in San Diego. Good morning, John, and welcome to These Days.
JOHN (Caller, San Diego): Good morning. Thanks for having me. Thanks for taking my call. I had a quick question. Based on what both guests have said about the housing market, I lean towards Matt a bit only because as a – I practice family law and in the last probably three to four years, I have not seen one single home owned by a divorcing couple that had any equity in it. Most of them were tremendously upside down. And I just don’t understand the, I guess, the economics where you’re pulling from as far as what goes into – what makes affordable housing. I’m not sure who the folks are that are buying the homes around here but I don’t really know too many people that are – have the ability in this market to even purchase a home at prices that would be 30, 40% less than what the home was four or five years ago. And I don’t know if they can comment on that. I guess I didn’t really have much of a question except to say…
JOHN: …if they could comment on what they see out there.
CAVANAUGH: Absolutely. Thank you, John. And Mark has a similar question. Let’s go right to another call. Mark is calling from Rancho Penasquitos. Good morning, Mark. Welcome to These Days.
MARK (Caller, Rancho Penasquitos): Thank you and good morning to all of you. I’d have to say I’m a real estate broker. I side with Matt in this regard. I buy at trustee sale at the courthouse steps. 500 houses a day in our county come up for sale, and 94% of those get postponed until tomorrow. At the same time 15% of all mortgages in San Diego County are not being paid. So it’s really unsustainable. It’s the Treasury Department and the Federal Reserve propping up, trying to make the situation look better but it’s artificially low inventory due to—I don’t mean to be a conspiracy theorist—but it’s government manipulation of the real estate market to try and make – stretch this out longer so prices don’t tumble. The market is totally unhealthy right now based on low inventory from a choked supply from the federal government.
CAVANAUGH: Well, Mark, thank you for that. I want to – Please, comment on either call if you’d like to, gentlemen. But I do want to follow up on something that John said. And, Matt, you would probably know this. Who is buying right now?
BATTIATA: Well, most of the transact – most of the buyers in San Diego County right now are using FHA loans. FHA, which is a government, you know, government entity…
BATTIATA: …you can put three and a half percent down so the majority – that’s really the only low down payment. And then you have VA, which is zero percent down, so it is true, I mean, FHA the other day said they’re going to lose something like eleven and a half billion dollars. Without FHA loans, it would be very difficult for people in San Diego County to buy homes. It’s not to say that there aren’t people buying with 20% down, etcetera, but your average buyer out there – FHA limits are now up to $729,000 as far as a purchase price. So, you know, that’s who’s buying. Without FHA loans, we’d be in big trouble. And, unfortunately, I think we’re going to see, you know, part of the wave of foreclosures that we’re going to see are people – and we’re already seeing it, is people that have bought over the last few years, used FHA loans, so they’ve only put three and a half percent down, and, for example, they may have bought in 2008 and they got a house for $500,000 where all the neighbors had bought and paid $700,000 so they thought, you know, they were getting a great deal. Now, unfortunately, again, if they lose their job or they get a divorce or for some reason they have to move, they’re upside down already. You know, now the homes are selling for in the fours and so it’s a short sale or a foreclosure. So, you know, the good news is it is getting much more affordable, you know, to answer I think it was Mark’s question. It is getting more affordable but it’s going to need to get more affordable to make, you know, for a recovery.
CAVANAUGH: Now we have to take a short break in a moment or two but before we go into the break, Gary, I do want to just start our discussion about the commercial market. Last time we talked, it was the commercial market that was the other shoe that was going to drop in San Diego. And I wonder if you can tell us what’s happening in the commercial market here in San Diego?
LONDON: The shoe dropped. You know, there’s a lot of unknowns in the residential side and part of the problem with the calls and the responses on the residential is that we’re dealing with a lack of empirical knowledge. We really don’t know what has happened with values. But the opposite is true in commercial. We know that there’s been an approximately 40% drop in commercial valuation across the board in terms of offices, retail centers, whatever we define as commercial.
CAVANAUGH: Why don’t we know that in residential?
LONDON: Because in residential, and your callers are indicative of the problem, one’s dealing – they’re both dealing in distress, one in foreclosures, one in divorce. The problem is that the market that’s active right now is not a dynamic market, it’s a corner of the market. But we’re seeing sales levels half of the levels that we saw during the run-up between 2001 and to 2005. Until we see more normalized levels, we’re not going to see more normalized transactions. What we’re seeing is all distress transactions, which, by definition, bring down the value of a house. So we really don’t know how low the value of a home has gone until we see a more normalized market which won’t happen until we see a more normalized economy.
CAVANAUGH: But just a quick question. Aren’t the commercial transactions that are happening now also distressed?
LONDON: They are but we measure them in terms of lease rates and rent and capitalization rates.
CAVANAUGH: I see.
LONDON: So we actually know how to – We actually can measure, when we see a commercial office building that’s 20% vacant, those lease rates have gone down a dollar per square foot per month and we know exactly what the value of that, what’s its tradable or fundable value is. So we know what the distress is. What we don’t know is how to work ourselves out of this distress because there’s so much surplus inventory in the commercial side, and that’s not the case in the residential side.
CAVANAUGH: Okay, we’ll continue this conversation about both residential and commercial real estate in San Diego and continue to take your calls after this short break. You’re listening to These Days on KPBS.
CAVANAUGH: I'm Maureen Cavanaugh. You're listening to These Days on KPBS. My guests are Matt Battiata, CEO of the Battiata Real Estate Group, Gary London, a real estate economist with the London Group Realty Advisors. And we are talking about getting, really, an update on the state of residential and commercial real estate in San Diego. And we’re also taking your calls at 1-888-895-5727 or if you’re listening online, you can join our live chat. On the line right now is Jay. He’s calling from Mt. Helix. And good morning, Jay. Welcome to These Days.
JAY (Caller, Mt. Helix): Well, good morning. Thank you for taking my call. I wanted to ask your two experts there, Mr. Battiata and Mr. London, what they think about all of the ARMs right now on people’s homes that are in good shape, we’re talking about the…
CAVANAUGH: Adjustable rate mortgages.
JAY: Right, we’re talking about the foreclosure inventory and we keep hearing news about foreclosures being down, notices of default being down and so forth. But it seems to me that lots of people like myself have a lot of these old interest-only indexed mortgages that are, you know, that are still, you know, that were fixed for five years or seven years or something then they became adjustable. And because the fed and other financial institutions have lowered interest rates so artificially these mortgages are really cheap right now. I mean, I have two mortgages that are under 3% at the moment and they’re interest-only and that’s the only reason that I can afford these mortgages right now. Completely upside down on the properties, like a lot of people. But it seems to me that must be a great big kind of rat and the snake that’s going to move – move down the snake until the fed inevitably has to raise interest rates and then these mortgages will become unaffordable and it would seem to me that we’re going to see a lot more foreclosures.
CAVANAUGH: Well, Jay, thank you for that question. Matt, what do you think about that?
BATTIATA: Yeah, that’s accurate. I mean, there are – Over the next three years, between 2010 and 2012, there’s something like $500 billion in ARMs, whether they’re just regular ARMs or option ARMs, that are going to reset and recast. And, unfortunately, about 60% of that $500 billion is in California and a percentage, a high percentage of those homes are upside down, which means they – people can’t refinance. So that is going to have an impact on the market. It’s been something that’s being predicted for the last few years and it hasn’t come to pass yet because interest rates are so low. But, you know, if and when interest rates go up, that’s going to definitely have an impact on the market. There’s absolutely no question about it. And it is – that is a huge factor as far as, you know, what’s going to happen with the market.
CAVANAUGH: And, you know, Bank of America reportedly sent out hundreds of letters to delinquent homeowners in March here in San Diego County and parts of Riverside County notifying them that their homes could be put up for auction in the very near future. Why is the foreclosure activity starting to ramp up now and is – would that have a good impact on the real estate market?
BATTIATA: No, that’ll – No. The reason it’s ramped up is we had, if you remember, in 2009 we had four concurrent foreclosure moratoriums in 2009. What that basically meant is very few people could get foreclosed on in 2009 and that’s why you hear stories about people who’ve been in their homes for a year or two without making any payments and haven’t been foreclosed on. Bank of America had a self-imposed moratorium on foreclosures. They were, due to political pressure, not foreclosing on people. That’s pretty much over right now. You know, what you’re referring to is in March the number of notice of trustee sales that BofA sent out was up 69% from the month before, so they are starting to send out foreclosure notices because they – really, the banks have been, for the most part, unwilling to modify people’s loans. And that is going to cause our inventory in San Diego to go up and, unfortunately, that kind of inventory, which, again, is foreclosures, what we call REOs, which stands for real estate owned by the bank, when those go on the market, you know, the banks, unfortunately, put them on at fire sale prices and it does drop the comps, I mean, it drops comparable sales dramatically. So it’s a negative for values and for the market in general.
CAVANAUGH: And, Gary, what are the consequences for the individual homeowner who’s going through foreclosure? What consequences do they have going forward in trying to reestablish credit and all of that?
LONDON: Well, I mean, there’s a time period. There are rules that suggest that foreclosure is ultimately – if it’s necessitated, it’s something that you want to do it, you know, at the end of all your decision making. I mean, we have got terms now called strategic foreclosure, this sort of thing, which sort of paints a nicer picture on it but, you know, I think most people recognize intuitively that if they can hold on, particularly given the circumstances that last gentleman suggested that the resets are actually reducing payments right now, that people probably ought to think about holding on, particularly in a supply constrained market like San Diego. Listen, the problem right now is we’re in sort of an economic cat and mouse game between the distress that Matt has painted a nice picture of and what the prospective upside is in terms of the economy, particularly our local economy. This is an economy that’s poised to grow at a much faster and higher rate than most other regions in the country. And if we catch a lucky streak here and we do see recovery in the marketplace and that recovery is significant, then some of this foreclosure distress and some of the otherwise devalued real estate scenario that we’re sort of seeing right now is going to change and bad things ultimately become better things and ultimately become good things. It’s just really a question of how long you, as an individual, can last and whether or not you have realistic prospects of having – of getting a better job or getting more money or seeing your theoretically underwater house, which, by the way, isn’t underwater unless you transact with it, of seeing that underwater house go back up in value again. And these are all sort of theoretical questions until we see how the economy’s going to come back.
CAVANAUGH: Let’s take another call. We are taking you calls at 1-888-895-5727, that’s 1-888-895-KPBS. And you can also post your comment online, KPBS.org/thesedays. Let’s hear from Susan calling from La Jolla. Good morning, Susan, and welcome to These Days.
SUSAN (Caller, La Jolla): Good morning. Thank you for taking my call. I just purchased a home last month and I represent a different group of folks than those people your guests have mentioned so far, I think. I have a pretty good job. I work at UCSD. I have excellent credit, and I had substantial savings. But up until the last year or so I had no hope of ever purchasing a home in San Diego. And I was able to get a short sale that had fallen out of escrow. I was pretty conservative in what I spent so that my payment is very manageable. I got a conventional 30-year fixed loan through my credit union. And I just feel like it’s a godsend. I can’t believe how lucky I’ve been. But I would’ve not had a chance to do any of this if the market were not in the situation that it is.
CAVANAUGH: Well, thank you, Susan. Well, here’s an example of someone with the low prices coming down has an opportunity to buy, would never have had that opportunity before. Are we going to start seeing more of this, Matt?
BATTIATA: Well, I mean, absolutely. It’s – That’s the silver lining in this market, is it’s – our big issue in San Diego is that it was unaffordable. And so now it’s getting more and more affordable and it’s going to continue to get more affordable. So good market or bad market, obviously it depends on who you ask, right?
BATTIATA: If you’re a buyer, it’s a much better market than it was a few years ago. And it’s like when we tell buyers, well, yeah, you know, you’re buying this property for 400, remember, you know, a few years ago this was a $750,000 house that you’re now able to get at 400 and you’re able to get an unbelievably low interest rate.
CAVANAUGH: Right, right.
BATTIATA: So, you know, from a buyer perspective, this – it’s all positive news candidly.
CAVANAUGH: But if our unemployment rate stays at about 10 or 11%, doesn’t that really shrink the number of people who would be in a position to buy a house even at a lower price, Gary?
LONDON: Well, San Diego’s growing. Even last year we grew by 39,000 people. And some of those people were people that came into this county with either a new job or the prospect of getting a new job. And as an economy recovers, there’s going to be more and more of those people. And so we’re going to see the unemployment rate gradually go down, and we’re going to – and certainly, we’re going to see the job creation rate go up in markets like San Diego. The – And your caller sort of portrays a part of San Diego which is important to put out in a discussion like this because Matt is absolutely spot on. I mean, this is a terrific time to buy a house. It may be a once in a lifetime opportunity to pick up a house at a bargain price at a – at low interest rates. And people that are thinking about buying a house ought to participate in the market right now because it’s a window and windows open and shut. The window’s still open but it’ll close eventually.
CAVANAUGH: Let’s take another call. Dan is calling from Oceanside. Good morning, Dan. Welcome to These Days.
DAN (Caller, Oceanside): Good morning. Thank you. Yeah, I’m actually a real estate agent and I had a couple of quick comments. The first one is that part of this process that’s going to have to happen here, I think, is that the short sale process is going to have to be cleaned out and expedited somewhat. A lot of buyers who are looking at short sales put in offers and then have those yanked out from under them at the last minute, and a lot of that depends on how the listing agent handles that. Listing agents can have a best offer that they go ahead and submit and really try to ride through the process with the lender and make sure that that best and highest offer goes all the way through the process. There are also agents, though, who frequently will take a listing, they’ll submit it to the bank, and then they’ll come back to everybody who put in a bid initially and ask for best highest and so people who have been through that process who initially put in the best and highest offer, end up becoming a little disillusioned by that and then just decide they don’t want to have anything to do with short sales and also the agents that have represented them now many times are reluctant to even deal with short sales because the process is such a pain in the neck and then frequently they end up having their fees chiseled down at the last minute by the banks and sometimes by the listing agents so that when they initially decide to take on the process they find out afterwards that they end up with very little in terms of what they thought was going to be a decent commission to deal with the headaches. And I would also say that, frankly, I think, Matt, I think you guys do a good job of handling a lot of inventory over there but I would say, though, when agents call up your office and just get a recording that says you have to submit everything in a full package and don’t expect any kind of a callback and the process is going to take months and months and months, I think that frankly discourages a lot of people and agents from going through that.
CAVANAUGH: Dan, thank you.
DAN: I’ll take you guys’ response off the air.
CAVANAUGH: Sure. Thanks for the call. And I’ll have you respond to Dan’s…
BATTIATA: You know, yeah, short sales are a frustrating process for everybody, buyers and agents…
BATTIATA: …and, you know, everybody involved. You know, there’s new HAFA – our new HAFA program, which the government put out on April fifth, is definitely having an impact on that. The HAFA program basically requires banks to evaluate offers on short sales in ten business days, and that’s a new program and, hopefully, that’s going to really expedite the short sale process. But, you know, he’s absolutely right. Short sales are a frustrating experience.
CAVANAUGH: You’ve been telling us that for a long time…
CAVANAUGH: …about the complications…
CAVANAUGH: …involved in that.
BATTIATA: And, you know, the other thing is that you’ve got to remember distress sales, short sales and foreclosures are only about 30% of the market in San Diego. You know, for first time buyers, it feels like it’s a much higher percentage because most of what they’re looking at are short sales and foreclosures but it is only 30% of the market. It does have a big impact because 30% is still a lot. But there are still regular sales out there as well.
CAVANAUGH: Let’s take another call. Nicole is calling from La Mesa. Good morning, Nicole. Welcome to These Days.
NICOLE (Caller, La Mesa): Good morning. Thanks for taking my call. I just wanted – My comment’s basically the same as some of the other people that have called in and one of the persons who said bad things turning into good. And I personally just – I hear economists and real estate agents saying that the market’s going to turn around and prices are going to go back up but I honestly hope that they never go back up and would like them to keep going down. As a young professional and my husband, a professional, we still can’t afford to buy a home even in where we want to live in La Mesa. And the majority of our friends who have young families can’t afford to buy a home either. And I still don’t see that happening unless prices continue to go down.
CAVANAUGH: Nicole, thank you so much. And, Gary?
LONDON: Yeah, that’s a really interesting comment and she paints a picture of San Diego that has always existed. You know, I’ve lived here as an adult for 35 years and, really, this concern has always been here, that there’s a disconnect between, you know, the sort of the desire to live in San Diego and the cost of it, of actually living and surviving here. And I will say this, that, again, this is the time in the market to be looking, for all the reasons that we’ve articulated this morning. That the economy is getting better, that job prospects will increase, that there’s a perpetual shortage of housing which will act to, at some level, either in spurts level or in terms of rapid bid-up, cause housing prices to go up again. And that, to me, is, as an economist, looking sort of from the 30,000 foot view, that, to me, is inevitable. So I think that we have this struggle of affordability and I don’t think it ever goes away. As a matter of fact, I think San Diego’s changing as a region and the affordability problems, over time, are going to become even more acute and we’re going to become more a region of haves and have-nots.
CAVANAUGH: I’m wondering, Matt, since we’ve had a couple of callers who are actively pursuing buying homes or have just bought them, what should a buyer do in this market? Should they, because they’re so complicated, steer clear of short sales? What should they be looking for?
BATTIATA: You know, you really can’t steer clear of short sales and foreclosures in this market, although it does depend on the area that you’re looking in and the price range that you’re looking in. There are definitely – You know, there’s many different San Diegos as we like to say and so obviously, you know, like the one caller in La Jolla, there’s less short sales and foreclosures in areas like La Jolla than there are in other areas so it does vary. But you’re really – For most people, you know, they can’t – The good news with short sales is they are getting expedited, they are getting easier to deal with and, you know, it sounds like a cliché but I think the best thing a buyer can do in this market is get a really good agent representing them because in this market you really do need it to navigate through the process.
CAVANAUGH: I’m wondering, too, in some of the statistics I was reading, that there’s a lot of activity going on in the upper and in the lower end of the real estate market. The lower, you know, the lower-priced houses and the higher-priced houses. But I’m wondering, that doesn’t go over and actually affect condominiums. Why are condominiums so difficult to move?
BATTIATA: Well, first of all, I would actually disagree. There is a lot of activity, I think, in the lower end because your first-time buyers are able to afford it. I don’t think there’s a lot of activity at the upper…
BATTIATA: …end. Condos, it really just depends on which price range you’re in. The primary issue with condos right now is that it’s very, very difficult to get financing for condos. Very, very difficult because…
CAVANAUGH: Why is that?
BATTIATA: …because you have a lot of condo conversions, number one, in San Diego. Number two, you have a lot of condo complexes where there have been lots of foreclosures, which means some of the homeowners associations have declared bankruptcy, which means you can’t get any financing. You’ve got many, many condos that were built and not built per FHA approval, which means FHA buyers can’t buy in there. You’ve got a lot of condos where you’ve had, you know, lots of foreclosures and as an example, and another impact of that is that you’ve got investors that bought those which means the owner occupancy is below 51% which means, guess what, you – it’s very difficult to get financing. So condos are – It’s not that, you know, condos, especially downtown, you know, it’s a great place and everything but it’s a very, very difficult market right now. And downtown you’ve got the added issues. You’ve got a lot of new construction and you’ve got lots of litigation. And, guess what, when you’ve got active litigation on a building, it’s very difficult to get financing. So that’s the biggest issue with condos. There’s nothing wrong with them until the banks – You know, the banks went from giving loans to everybody to now making it – still, the credit market is very, very tight, and that has a huge impact on trying to buy a condo.
CAVANAUGH: We have to take a short break. When we return, we’ll continue our discussion about real estate in San Diego and continue to take your calls at 1-888-895-5727. You’re listening to These Days on KP…
CAVANAUGH: I'm Maureen Cavanaugh. You're listening to These Days on KPBS. My guests are Gary London, a real estate economist with the London Group Realty Advisors, and Matt Battiata, CEO of the Battiata Real Estate Group. We’re taking your calls about real estate in San Diego, 1-888-895-5727 or if you’re listening online, you can join our live chat. Now during the break, we had a very interesting conversation. I want to share it with our listeners. And that is about the idea that in this market there really are no trade-up buyers. Explain what you mean by that.
BATTIATA: Well, you have a lot of – a huge percentage of the people in San Diego County that don’t have any equity so they can’t make the decision that, say, we’re going to sell our $500,000 house and trade up to an $800,000 house because the only way they can sell that $500,000 house is through a short sale. So that’s a segment of the market that used to be a huge part of the market that we’re missing right now. The only people that are selling, for the most part, you do have some people who have equity and they can sell their homes in a regular equity sale. But for everyone that’s upside down, they’re only going to sell if they have to sell. And that is also limiting the amount of inventory on the market. For them to be able to do a regular sale, they have to wait until values come back up to when they bought.
CAVANAUGH: And that’s the impediment in making the – in turning this market around to a normal market, is that right, Gary?
LONDON: It’s exactly right. Right now, the number of listings in the county on a monthly basis is about half what it is in a normalized marketplace for exactly the reasons that Matt has suggested. This is a have-to sellers market. And the have-to sellers are the distress sellers. So when you have a have-to sellers market, you have lower prices, you have more distress, fewer transactions, and other people sort of waiting on the sidelines if they can. The market, when it normalizes, will double the amount of listing inventory, prices will start to increase, the economy will grow again. And we’re just in that snapshot in time where that hasn’t happened yet. And, by the way, it’s better now than it was last year when we had this conversation so we’re going in the right direction but we certainly haven’t gotten there yet. And it’s going to take some additional time to play out, probably on the order of two to three years because we’ve got a lot of garbage that we’ve got to deal with which we’ve spent most of this conversation…
LONDON: …talking about.
CAVANAUGH: We’re having people participate in a live chat and we’re getting a lot of questions about investors participating in this market and what kind of impact they’re having.
LONDON: Well, you know, this is – You know, the investors are predictably and usually wisely regarding this as a bottom market and they’re picking up bargains on the anticipation of an upside. It’s actually a good sign. In other words, it’s a sign of confidence in the future that investors are coming in now and they’re going to hold the properties. They can do it economically because they’re buying at a lower basis. There’s a big rental market out there. People that don’t buy, rent. The rent occupancy is real low. So, you know, that’s a good situation. And as the market corrects itself then those homes go back on the market. There’s a capital gain, and investors made a wise decision.
BATTIATA: I, you know, what I would add to that, though, is I think most of the investors that I see, and this is like one of our earlier callers who’s buying at the courthouse steps, most of the investors that I see are actually not buying – some of them are buying and holding and renting the properties out. But I think a higher percentage are actually buying them and flipping them immediately. So buying below market, immediately putting them on the market and selling them but, you know, I think you need investors in the market. There has been legislation through this whole real estate crisis that was really, you know, sort of blaming investors for what’s gone on in the market and not that there isn’t some blame there but, in general, for the market to recover, you need investors. And, you know, a regular buyer is not going to buy that foreclosure that’s been destroyed and needs $50,000 of rehab. The only one that’s going to buy that is an investor. So investors are, you know, are a positive thing for the market.
CAVANAUGH: Let’s take another call. Bill’s calling from San Diego. Good morning, Bill. Welcome to These Days.
BILL (Caller, San Diego): Good morning. Thanks for taking the call. I have a couple – I have a question kind of dovetailed with a comment. First off, the question, how would a person who is able to make their payments convince a lender, a bank, to modify a note? I want to modify a note. I know a lot of people in the same place, but we really don’t want to just stop making the payment. Like the earlier caller, we can make the payment now but sometime in the future if interest rates go a lot higher, which they’re likely to, we won’t be able to.
BILL: And then the comment is I think most of us have been had. When you go to your lender, you go to your mortgage broker or realtor to find a home, you present your documents and you’re trusting that person to be professional and help you find a home and describe the real estate situation to some degree, I mean, I know they’re not a prognosticator but we’ve all been had. Now we’ve had tax money taken from us to bail out the banks who told the appraisers to go out and hit target after target after target to jack up the volumes and now we’re all set – we’re all left holding the bag here…
CAVANAUGH: Right, right.
BILL: …and yeah.
BILL: You can…
CAVANAUGH: We can take it from there, Bill. Thank you so much for that question and comment. So Bill’s got a situation where he wants a loan modification but he doesn’t want to miss any payments, is that going to be something he’s going to be able to do, Matt?
BATTIATA: Well, I don’t think – Unfortunately, the majority of people that apply for loan modifications are denied. It’s – Literally, the statistic is ninety – what I’ve read is it’s about 95% of the people that apply for loan mods are…
BATTIATA: …denied. Because the banks don’t want to modify people’s loans because they make their money from interest. So – And in his question where he said, you know, I can afford it at the moment and I don’t want to miss any payments, unfortunately, most of the lenders will tell borrowers, listen, we can’t help you until you stop making your payments. It’s – The loan modification situation—as you know, I’ve been to Capitol Hill now the last two years in a row—is horrible. The banks basically, as I said, have virtually no interest in modifying people’s loans. So, unfortunately, the answer to that question is I don’t think – whether he stops making payments or keeps making payments, I doubt very much that they’re going to modify his loan unless something changes in the banking industry. And then just to – with regard to his other comment, I think everybody agrees with him 100% that I think the average individual in the street, everybody feels like we’ve been had by the banking industry and by the government, by the bailout. You know, the banks made a ton of money on the way up and they’ve made a ton of money on the way down, and the average guy in the street is kind of scratching his head saying, you know, what about me? So I think we all feel that way.
CAVANAUGH: I want to squeeze in a couple more calls but before we do, I want to go back to commercial real estate, especially, Gary, commercial real estate downtown. There are a couple of hotels that are in serious trouble, Saks Fifth Avenue I know it’s not downtown, it’s in Fashion Valley, but they’ve announced that they’re closing their store at Fashion Valley. So what is the state of commercial real estate?
LONDON: Well, commercial real estate is, as I indicated earlier, is at a high level of distress right now. Values are down. We can measure those values, we absolutely know they’re down. And the commercial markets aren’t going to recover until space gets reoccupied and here’s the rub. In the retail sector—and you mentioned Saks Fifth Avenue—which is an 81,000 foot footprint in probably San Diego’s best performing regional shopping center, Fashion Valley. Well, they’re going to come in and they’re going to cut that space up into smaller boutique spaces and they’re going to find other solutions. However, that problem is way more acute when you bring into the discussion the distressed retail shopping centers that – hundreds of them in San Diego County that have no economic reason for existence in the future because we’ve compressed the amount – the need for these shopping centers. The competition from the internet, the lower consumer expenditure levels, old assets, old inventory, a lot of these problems have sort of conspired to creating an overage in the retail market. A lot of these retail centers are going to have to have a different economic reason to exist. In other words, they’ll be transformed into something else, maybe mixed use projects, maybe apartments where old anchor grocery stores used to be. This is what I see.
CAVANAUGH: So you see this as a long term consequence of this recession, that we’re going to see maybe a changing face of commercial real estate.
LONDON: Absolutely. It’s going to be a reset. We’re going to see it in a lot of the commercial inventory, be it shopping centers, be it strip commercial. Even in the commercial office sector where we have 110 million square feet of office space, 75 million of which in this region are what we call class B and C, which means that they’re older or they’re less well located. Well, they have to find ways to compete again. They may not compete as offices anymore. They may be converted to condominiums at some point, presumably with healthier HOAs.
LONDON: But, you know, I mean, or they might find sort of new configurations or maybe some might get torn down. We are in a sort of a reset place right now. It’s going to be a really a very new world, a very interesting world in the commercial arena for the next couple of decades.
CAVANAUGH: And Matt.
BATTIATA: And, again, there’s a very positive aspect to that as well. If you’re a company that wants to move into the San Diego County or wants to expand your business, whether you’re in the – whether it’s office space or retail space, guess what, it’s a lot cheaper to do that, and that’s a huge – that’s a positive, really, for the business environment in San Diego.
CAVANAUGH: Let’s take another call. Bobbi is calling from Coronado. Good morning, Bobbi. Welcome to These Days.
BOBBI (Caller, Coronado): Good morning. I have a kind of a general question, not a recession question. In the last 10 years, between my daughter, adult daughter, and myself, we’ve closed on three different properties. We were pretty well funded to – going into it. She had two months on one of hers, I had two months on one of mine to close and get the thing done. All three of them came down to the last hour and a half. People were running around. I had to be pulled out of my place that I was – I was getting a service done, and my husband ran over and said this has to be signed immediately. We have to fax it through to the lender. Why does it always come down to the final second literally. He was driving to Escondido, you know, in the last moment, and it had to be done by midnight of that day. I – It was the most frustrating thing. I’m just wondering if other callers have had the same experience. Is that normal?
CAVANAUGH: Bobbi, I think that’s just the craziness of real estate. What do you think, Matt?
BATTIATA: I think, you know, and it doesn’t have to be that way. It is sometimes, and people always wonder why is it I can go into, you know, a car dealership and buy, you know, a hundred thousand dollar car in, you know, in 20 minutes or a half an hour and yet why does it take 45 days and all this back and forth ridiculousness just to get a loan to buy a house? It is sort of an antiquated process. There’s a lot of moving parts, and if it’s not orchestrated, you know, perfectly then you get, you know, you get the racing out to Escondido to get something notarized. But it doesn’t have to be that way but we’ve all been through that. I agree, though, it, hopefully, will get – become a more streamlined process.
CAVANAUGH: You know, I would like to ask you both a couple of closing questions, if I may, because we’re just about out of time. And I, you know, I know that you can’t really see into a crystal ball but if you were – you’re talking to people who are thinking of buying, possibly selling their homes in the next three to six months, Gary, I’m wondering what advice you would give them?
LONDON: Well, I would hold off selling. I think that in this transitional market, as we’re sort of poised towards recovery, that if you can afford to just hold off until the market sort of sorts itself off, you really ought to. But as a buyer, again, I would concur with something Matt said earlier. You know, this is – for lots of reasons this is a terrific time to buy. I don’t think it gets better than this. And, parenthetically, I will tell you, that the building industry is not poised at all to add much new inventory into this market, so it’s not like you’re waiting for sort of the next iPad to come out or the next good product. You know, it’s not going to be there. And, as a matter of fact, most of the product that we’re going to see over the next 10 years is probably inevitably going to be high density condominium new development. So I think that this is an excellent time to buy if you can put money down and you can – you have good credit. I think it’s probably not a great time to sell.
CAVANAUGH: And Matt.
BATTIATA: Well, I would – I’ll use another analogy to describe the market, which is that real estate markets are kind of like a big cruise ship out on the ocean. Even, you know, they get momentum and even once you turn off the engines and turn off the propellers, that ship keeps drifting. So even if – you know, I think we are getting close to the bottom but let’s say in six months – let’s say even right now we’ve turned the engines off. Well, this ship has a lot of momentum and we’re going to drift, I think, downward for really the next couple of years. If 2012 is the bottom of this market and which means we’re actually going to start turning the corner it’ll – you know, the reality is, it’ll take two or three years just to get back up to the prices that we’re at today. So, you know, the answer is it depends what your objectives are. If you’re selling your property to trade up to another one, you’re trading money, you don’t need to wait to do anything. But if you’re looking to, I think, maximize your return and get out of the market, I think you’re better off selling sooner rather than later unless you’re going to hold it for the long term.
CAVANAUGH: Thank you, gentlemen. Thank you so much. A lot of good information. I’ve been speaking with Gary London with the London Group Realty Advisors, and Matt Battiata of the Battiata Real Estate Group. I want to let everyone know if you’d like to comment about this segment, you can go online, KPBS.org/thesedays. Stay with us for hour two. You’re listening to These Days on KPBS.
To view PDF documents, Download Acrobat Reader.