Snapshot of San Diego's Underwater Homes

CAVANAUGH: I'm Maureen Cavanaugh. It's Monday, December 5th. Our top story of Midday Edition, since the great real estate collapse of 2008, California has been looking for any good news at all about the housing market. And there is a lot bit of good news for the first time in three years, California is out of the top five states where homeowners owe more on their mortgages than thirds requirement homes are worth. According to the latest report, California rates No.†6. Joining me to talk about the continuing woes of the real estate market of my guests, doctor Michael Lee is director of SDSU's Corky McMillan center for real estate. LEE: Thank you Maureen. And Lilly Leung is report are for the San Diego Union Tribune. Thanks for coming in LEUNG: Good to be here. CAVANAUGH: Lilly, you reported on the core logic data that I just mentioned. Is that the extent of the good news? That we're No.†6? LEUNG: I think you're right. That was a slice of good news. We finally left that top five, and Georgia inched in in front of us, but the point is we're still very far away from recovery. The number of homes in negative equity are still really high. In fact, the state numbers are about 29% of homes in the state are under water. And locally, the number is higher. About 1/3 of homes in San Diego County are in that state, according to a recent snapshot from data quick. CAVANAUGH: Which states are in worse shape than we are? LEUNG: Topping the list is Nevada, which is not surprising, given the state of foreclosures and the stress over there. Second is Arizona, also not surprising, followed by Florida and Michigan and Georgia, which inched ahead this time around. CAVANAUGH: Give us a little background, if you would, the term used is under water. What does it mean to be under water? LEUNG: It means you owe more on your mortgage than what it's worth. Basically it's become unsustainable. And a lot of homeowners are dealing with this, and it's a problem especially for people who want to refinance, but they can't. So there's a lot of struggles with being under water. CAVANAUGH: And doctor Lee, so we're all very clear on what these terms mean, what we talk about under water on the mortgage, how does a home actually get that way? Does it come from the appraisals that surround it in the same neighborhood? LEE: Well, it's coming from the fact that the value of the house has fallen, which we've seen since the peak, about 35 or more% fall in the average house price. And your mortgage only amertizes slowly so your mortgage is roughly constantly, house prices declining, so your value ratio is rising. CAVANAUGH: And there are some people saying I this house for $300,000 how can it be worth less? LEE: Real estate goes in cycle. We had a portion of the cycle in the middle part of of the last decade where we had a lot of what you might call irrational exuberance. And prices were bid up beyond what was affordable or sustainable. And when the financial crisis hit, hate of the home values turned out to not be supportable and have fallen. And I think now, we're waiting to see when and if the house prices will start recovering again, which is the main way we're going to reduce this negative equity burden. CAVANAUGH: And in addition, your article, there are quite a few homes in San Diego that are almost under water. What does that mean? LEUNG: Those are people on the cusp. They are dangerously there. And that's a big risk, especially if you're in a tenuous situation with your job or in a situation where you're economically not stable. If you're on that cusp, it's -- that's a segment you want to look after. They can easily go to the other side, and be under water. CAVANAUGH: And I read there are about 300,000 homes in that particular -- where they're just on the cutting knowledge of almost not having the value that their mortgage is. LEUNG: That is correct. CAVANAUGH: For the last several years, doctor Lee, you've been saying housing assessments have gone down dramatically. Are they still going do you understand? LEE: They are going down. Not nearly as fast or as much as they were before, but the housing market has slipped back into a small state of monthly decline, and it reflects the fact it's still weak. Two major factors, one is the% of sales that are in the market these days that are distressed properties, basic REOs or short sale, are still a very high percentage. 40% or more of sales are that. And distressed sales will tend to drag down averages. The second Sdemand is still weak. Lilly pointed to one reason that people can't refinance, they can't sell their house and trade up as we've seen in the past because of the fact that they're under water. And the other part is, you know, the overall economy and job growth is still not really strong, and people don't have the confident. And this is where the negative equity comes into play, because people hear the news reports of the large number of distressed properties that are going to hit the market at some point in time or the possibility that a good portion of these negative equity folks may eventually default. So you have a shadow inventory of those kind of potential sales coming on. CAVANAUGH: Why buy now if you think prices are going to rise? LEUNG: Right, people are still waiting are if the market to reach bottom, as we've been talking about for about 2.5, 3†years. Where is the bottom? LEE: I think we're bouncing along the bottom. I think we can still have some further reductions in price, but they're not going to be significant. So when I hear people talk about it, I say don't buy a house today, particularly one that you want to live in as an owner, occupier, thinking that, well, prices may decline another 5% in another 12†months. If you find something that you like and you can finance it, then this is probably as good a time as any. CAVANAUGH: Lilly, that's a link to neighborhoods in San Diego that have the MOST trouble with under water mortgages. And I'm wondering, which are the neighborhoods in San Diego that are really in distress when it comes to that? LEUNG: No.†1 in the most recent snapshot we took was Logan heights. On the lower end was Sorrento Valley. CAVANAUGH: Those are the two poles. I saw in the list, there are some that are really scary. 46% of homes in Bonita are classified as under water. About 45% in city heights, about 49% in the Kensington, normal heights area. And I want to tell listeners, we have a link to this data quick you should water snapshot of homes in San Diego on our website, KPBS.org. What does it mean to those neighborhoods when there are so many homes that are under water? Does it mean that the neighborhood itself is in financial distress? Does it mean that you can forget about any real estate activity in this particular area of town you? What does it mean? LEE: What you have going on is that those maces that have had the biggest declines in house prices are most likely those areas that have the biggest percentage of foreclosures and distressed sales. And that tends to drive the prices down further. S why, this is financial difficulty in those areas. We've seen that in terms of the incidence, mortgage delft, and foreclosure, that it's hit low, and moderate middle income neighborhoods more than it's hit upper income neighborhoods. In part, because people in upper income neighborhoods aren't necessarily -- they're still able to afford the mortgages, and they're not walking away as much as you have in some of these other lower priced neighborhoods. CAVANAUGH: There you go, with the whole term of walking away, it's the idea, if you get to the point where you owe so much more on your home than it's worth, what is the incentive to keep paying on that house? LEE: Prices may come back, and that negative equity can go away. That's one aspect. Secondly, there are costs associated with both going through a foreclosure on your credit record as well as you have to move, eventually. So I think those are things that keep people in-house. But this negative equity, and the extent of it is really a risk to the market because we know that if anything happens to these borrowers, if something illness-wise or loss of income, then when you're 130%, you're almost assuredly going to walk away from that. Then you have the strategic defaulters who say I don't think house prices are going to come back, and is this just a financial obligation, so here are the keys. CAVANAUGH: We've heard about a backlog of people in essence turning over their keys to banks. Where are we on the backlog of foreclosures we've heard of in banks? LEE: We're beginning to see clear are in that we're seeing the rate of foreclosures starting to rise. And I think that reflects the fact that banks are getting through the backlog. They've got their processes now that are more in line with regulators, etc, want. CAVANAUGH: So the rate of foreclosures increasing is thrill a good sign? LEE: Yes, because you need to clear the market. You have to get rid of this overhang. And when your average person is delinquent for more than a year before the foreclosure process actually starts, the chances of them actually being able to cure the mortgage are not very high at all. They're very, very low, as a matter of fact. So getting that inventory, that foreclosure or distressed inventory through the system is going to be necessary to stabilize the market, and allow normal processes to dominate. CAVANAUGH: In the fact that perhaps seeing an increase in the rate of foreclosures would be a good sign for the real estate market, lilly, I think there's a lot of information that we get in numbers and in statistics and so forth that come out each month, and it's very confusing, very hard for people who are not in real estate to keep track of what is happening. What trends have you observed in reporting on the San Diego real estate market recently? And where do you think we are in this process of trying to recover? LEUNG: That's a very good point. Myself, I am bombarded with data every day. Some things to keep in mind are what doctor Lee said. We are going through the distress. In fact, the most recent snapshot bidate quick says that the median in terms of notices of defaults, the loans that we're seeing right now that we're working through, they originated in the last quarter of 2006. CAVANAUGH: Oh. LEUNG: And if you remember, that's about the time when the -- when loans started tightening up in terms of regulations and underwriting. Just looking at that, it seems like they're at the tail end of the worst part, which is what I'm hearing for a lot of people CAVANAUGH: The tail end of the worst part. Not yet in recovery but basically sort of finally getting through the worst of all of these very high-end mortgage, and the people who can't sustain them; is that right? LEE: I would agree with what lilly said. I would again say that the large percent of homes that have negative equity still represent a risk because a lot of those that are paying are current now, but if they do go into default, they can drive prices down further. So we have to hope we do bottom out, confidence comes back to the market, and the negative equity will slowly shrink MAUREEN CAVANAUGH: Are people having more luck than they used to in having loan modification or approaching their banks sometimes? I think this is like a fantasy with the principle modification. But what have you been hearing, doctor Lee? LEE: Well, that's kind. The holy grail of the modifications is that we know that the current modifications, which just lower payments, really haven't worked all that well. And we know that this negative equity is really a major driver in default. So principle modification, principle reduction is the one way you can significantly reduce the portion of defaults. Basics for their own portfolio mortgages are doing more principle reductions. About a third of their modifications on loans they own have principle reduction. And it's significantly up, and their redelft rates are down. The government agencies won't allow that, Freddy mack, FHA, so that's where most of the loans reside, and we're not seeing any much of a change. We had some modifications in the HARP program, which is not modifications but it has some of the same effects, allowing under water borrowers to refinance even though their loan-to-value ratios are well over 100%. I think that'll have a modest positive effect on the market. CAVANAUGH: Both of you have taken us through a lot of very complicated information in a very short amount of time. Thank you both so much for speaking with us today. LEE: Thank you, Maureen. Pleasure to be here LEUNG: Thank you. &%F0