Local Real Estate: On The Rebound Or Facing Double-Dip?
Tuesday, July 5, 2011
Along with a new state budget, late last week Governor Jerry Brown signed two bills drastically changing redevelopment agencies in California. These bills end the agencies as we've known them and require future agencies to use less property tax, with more going to local school districts. The change puts in question some major redevelopment projects in San Diego, along with making a serious impact on affordable housing.
Is the local housing market showing signs of a rebound, or can we expect more home price declines in the next few months? We discuss the latest local real estate numbers, and look ahead to what the rest of the year might hold for the San Diego market.
Matt Battiata, CEO and Broker in Charge of the Battiata Real Estate Group
Gary London, a real estate economist with the London Group Realty Advisors
Lori Weisberg, staff writer for the San Diego Union-Tribune
CAVANAUGH: Redevelopment has changed the face of downtown San Diego, but the age of sanctioned redevelopment agencies may be coming to an end. First, take a look at San Diego's housing market. A year ago, a bump in sales and home prices fueled by government tax incentives raised hopes that the recession battered real estate market was beginning to rebound. But it seems news of that recovery has been greatly exaggerated. The latest numbers show the housing market continuing to struggle not only in San Diego and California, but across the nation. Joining me are my guests, Matt Battiata, ceo and broker in charge of the Battiata really estate group.
BATTIATA: Good morning. I mean good afternoon.
CAVANAUGH: Don't worry about it. In the interests of full disclosure, the Battiata Real Estate Group is an underwriter of KPBS. And Gary London is here. He's a state economist with the London Group Realty Advisors. Hi.
LONDON: Good morning. Good afternoon. I'm doing it too.
CAVANAUGH: I want to let our listeners know they're invited to get on the phone with their questions and comments with the real estate market. 1-888-895-5727. Gary, spring, early summer, usually prime time for the housing market. But the numbers are not going the right way. Sales are down from April and from last year. What do you think is happening right now in the market?
LONDON: Well, the market is still trying to clear, which is fort of a fancy economic way of saying that we're still reading the market of the distress heritage properties that characterized the climate over the last, really, almost six years now. And that process still is not completed. It's a clearing of the market, and the market still has apparently some time to go before it's fully cleared and we can start seeing some upward progress in terms of both sales activities and valuation increases.
CAVANAUGH: Do you go?
BATTIATA: I think the biggest issue, Maureen is that almost half the homes in San Diego county are incumbered by mortgages, most peoples are upside down. And when I've got about half the market that if for any reason they need to sell, whether it's any of the reasons, job, divorce, transfer, etc, they're all distressed sales. They're all best cases, short sale, and worst case a foreclosure. That's the issue that we've got in San Diego county. And that's why we're -- we still haven't bottomed out and started to recover. As Gary said, we have to clear all the people that are in homes they can't afford, we have to clear that inventory out of the market to bottom out.
CAVANAUGH: And Gary?
LONDON: Well, I just want to reflect on something matt said which is that the preponderance of activity that has taken place over the last six years has been distressed sales. We have to get past that point of distress before we see some upward movement in the marketplace. And because all we're seeing is distress, we're seeing the markets continue to crawl along the bottom, and valuation not to come up. So this concept of under water loans is a little bit illusionary in the sense that of course everything is under water, but people who are not in distress is are not participating in the marketplace. That's the problem. We have to get normal transactions back into the market. We haven't gotten to that point yet.
CAVANAUGH: I want to take a caller on the line in a moment. But i want to ask you, matt, what are you hearing from buyers and sellers now? There must be a great deal of frustration because everybody has been waiting for several years now.
BATTIATA: It depends on your perspective. From a buyer's perspective, the big issue in San Diego county has always been affordability. The market's gotten a lot more affordable now. In many areas we're down 40 to 50%. From a buyer's perspective, you've got low interest rates and that $700,000 house in a lot of cases is now 350. It makes it more affordable. From a seller's perspective, the people who are selling are people who have to sell. They have to get out. A person that has the choice to sit and wait, they're gonna wait the market out because they don't want to sell their homes for what they're currently worth.
CAVANAUGH: Jared is calling from la mesa. Hi, Jared, welcome to midday edition.
New speaker: Thank you. I'm just curious -- i hear all the talk about the housing market, housing being more affordable, and is it time or not time to buy. My wife and i are young, graduated San Diego state, make decent wages and i cannot -- I've been approved but that for funding to buy a home but can't find anything. And i constantly hear about there being homes and it's the time to buy, and the state of the market here in San Diego, but it's like when it comes to putting your foot to pay, you can't buy anything. I'm just curious if the hype is real or if it's just all for rich people and not the average citizen of San Diego.
CAVANAUGH: Jared, let me ask you so that i can help the experts answer your question. Where are you looking?
NEW SPEAKER: Really, anywhere. We've opened up to east county, north county, anywhere in San Diego.
CAVANAUGH: Okay. Well, why can't Jared find anything?
BATTIATA: Well, the market has gotten -- it's gotten much more affordable but we're still on our way to getting more affordable. It's still an expensive market relative to incomes in San Diego county. That's why it's frustrating for a buyer, especially now because there are no more stated income loans. You have to qualify on your two last years of tax returns. The good news for Jared is that the market is still declining so from a buyer's perspective, if he's patient i think he will find something.
CAVANAUGH: How about the availability of home loans? Are lenders lending, Gary?
LONDON: No. Essentially they say they're lending, and interest rates are at historical lows. They're going to stay low for probably up to the next three years. The problem is that lenders are being extremely careful as to who they loan toward. Which is exactly the opposite of the behavior that they took -- that they had when -- before 2005. So the pendulum has swung the exact opposite direction. Your caller qualifies. He can't find a house. And the reason he can't find a house is precisely because of what matt said, which is that people will hold back in putting their house on the market to sell if they can because they don't want to sell at a bottom price.
BATTIATA: Sure. I'm sure most of the homes that Jared is probably out looking at are either short sales or foreclosures. The average person if they don't have to sell and they have equity, when they realize what they could sell their home for in the present market, they say i wouldn't sell my house for that. So i guess I'm gonna hang onto it.
LONDON: And most people are in that situation. Because the problem we have right now is -- the reason we see distress is because we're still having economic problems. People are still -- out of works, concerned about their working concerned about their future. This has a direct impact on the housing market.
CAVANAUGH: Let's talk about some of the big underlying issues preventing both the local and the national markets from rebounding. I've heard people talk about a lack of consumer confidence. People are still leery about whether or not they're gonna have a job, so they don't want to buy a house. What are some of those underlying factors?
LONDON: In my view, it's mostly about behavior. People still are not optimistic about the economic recovery. It's going too slow, taking too long. And that impacts their decisions certainly in the real estate market. I don't believe the economy recovers, frankly, until the real estate market and housing market recovers. I don't think there's another solution out there for our economy, because the construction and real estate market are too important in terms of creating jobs. Until something happens to create confidence, wee not going to see the recovering. We're going to continue to bounce along the bottom.
BATTIATA: And another point is that there was a report that came out last week that said there's potentially six million foreclosures coming down the pike. A big part of that was there's all this shadow inventory. That's a million homes that the banks have foreclosed on and are just sitting on. There's another million that they're foreclosing on, four million loans that are in some stage of default. When people hear that, they think, well, gee, the market hasn't bottomed out yet, it's probably not time to get in. So more people sit on the side lines.
CAVANAUGH: Are there areas of the local market that are doing fairly well?
BATTIATA: The better areas -- the most desirable areas always weather the storm the best. But every part of the market is slow in San Diego county right now, candidly.
CAVANAUGH: What about commercial real estate, Gary?
LONDON: Commercial real estate's in worst condition. At least with residential we can see the light thea the end of the tunnel because ultimately we have limited inventory. Once we see a recovering, we're not going to have enough housing for the demand that's going to be here in the region, provided the region grows economically. On the commercial side, we just have too much outdated inventory in terms of offices, retail, even in terms of industrial. So there's going to be a lot of changes in that sector. And i think the commercial sector is going to be in for a much longer slog of recovery than the residential sector.
CAVANAUGH: We talked about the difference between the higher end housing doing fairly well in comparison. What about multifamily housing and condos?
LONDON: I think it's -- the for sale condos are struggling at the same level as single family residential. In the investment world we're seeing the multifamily investment as the real darling of capital investors right now. If you can find not just a good deal but just a decent deal on investing in an apartment, capital investors are investing across the nation, regardless of the metropolitan areas. They believe the contrary is the case on the rental side, that people are going to rent before they buy. And that's going to keep occupancy high. And that will ultimately boost rent rates, which is bad news for renters, good news for investors.
CAVANAUGH: I want to get your take on something that Gary said, matt. It sounded almost as if a -- it was a self fulfilling prophecy. That the number of people who are under water continues to grow because actually the bottom -- we haven't reached the bottom in housing prices yet. So you may be doing fine, but then you find out your house is actually worth $7,000 less than you thought, and you automatically find yourself underwater.
BATTIATA: Sure. It's happening. Unfortunately the market is still declining. I'm gonna be optimistic and say maybe we're a year from the bottom, but we might be two years from the bottom as far as the market coming back. And as it continues to decline, you have more and more people upside down. As long as they can afford to make their payments, they're fine. But if anything happens, if they need to move or suddenly can't afford their payments any longer. The banks have shown themselves to be unwilling to help anybody in a real way as far as doing loan modifications. So these people find themselves, and I get calls every day, well, my company is transferring me to Texas, and I happen to be upside down. So we gotta do a short sale. It's very, very common.
CAVANAUGH: I want to ask you both quickly before the break, we have the idea of housing prices continuing to go down. And we had this incentive last year in April, these tax incentives, and we thought that that was going to provide a big rebound for the housing industry. What went wrong? Why didn't that work over the long-term?
BATTIATA: It worked over the short term is the problem. The issue is that all the government intervention which has been very well intentioned on the part of trying to force the banks to help people, the banks -- all it's really done is prolonged the decline. It would have been a much sharper decline, believe it or not, and maybe that wouldn't have been a good thing, but at least it would have been over fast faster. It's simply prolonging the agony. . The biggest problem with shadow inventory are the people who are in what i call loan modification limo. They have been trying for a year or longer to modify their homes. They're in default, not making payments. And these people are either going to end up in a short sale or a foreclosure. That's probably the biggest number as far as shadow inventory looming on the horizon.
CAVANAUGH: When we return we'll talk about what statistics can tell us about the San Diego housing market during the last ten years, and how they might predict the next phase for real estate. Matt Battiata and Gary London are staying with me. And we'll be changed by the ut's Lori Weisberg. It's 12:20, you're listening to kpbs midday edition.
CAVANAUGH: This is KPBS midday edition. I'm Maureen Cavanaugh. We continue our update on the San Diego real estate market. My quests are Matt Battiata, ceo of the Battiata real estate group, Gary London with the london reality advisors, and joining us is Lori Weis berg, staff writer for the San Diego union tribune. Hi Lori.
WEISBERG: Thanks for having me.
CAVANAUGH: I know that you've done a series of articles and have been looking into the raid of local home ownership and compiling some stats with the real estate market over the last ten years. How has the rate of local home ownership changed in the last decade?
WEISBERG: It's really remained flat from 2,000. What we were able to tell, mid decade, looking at the census bureau's -- the American community survey: It showed that the home ownership rate jumped by about 4 or 5 percentage points mid decade, reflecting the run up in the housing market. All those gains vanished by the end of the decade. You can see the fallout from the bus when you look at the home ownership rate by itself.
CAVANAUGH: One of the things that you say is the number of local homeowners increased but the rate of home ownership is down. Can you explain the difference?
WEISBERG: Rice, right, well, i mean obviously, the population is growing at the same time that more people are buying. But it's more just a mathematical statistic. It's the proportion of people who own their own homes have remained the same while the population has grown. It's more a functional -- it's a more statistical thing that's going on. The number of homeowners has increased in part because there's a lot of new homes that were built over the decade. But when you divide that into the number of people in occupied homes, that rate has either gone down in some areas or in some areas like downtown and the neighborhoods downtown it actually went up.
CAVANAUGH: It would be interesting to see a graph of the statistics you looked at. Did you see a huge up turn around the mid 2000s and then a sharp decline?
WEISBERG: Home ownership rates move pretty glacially. It takes a lot to make them move. I guess in the world of home ownership rates, i guess it was a sharp downturn mid-decade. It stayed constant as you get to the mid-decade, then it shot up about 4 or 5%age points, post bust, it was back to where it was in 2,000.
CAVANAUGH: So basically we're back to the begin.
WEISBERG: Right. And some would argue that's where we should have been all along.
CAVANAUGH: Downtown San Diego has seen an increase in home ownership. Where else?
WEISBERG: Some of the neighborhoods around it, normal heights, midtown, Northpark, to a lesser degree golden hill. Those areas saw increases. And what i thought was interesting is that a lot of those suburbs like east lake, Otay ranch, Carmel valley, you had a big run up in the number of units that were created. And that's where you saw the home ownership rates actually decline pretty substantially. Even though those are areas that had high ownership rates to begin with.
CAVANAUGH: Lori, i want to thank you. I know that compiling those statistics is not always glamorous. But it's awfully important. Thank you so much.
WEISBERG: Thank you.
CAVANAUGH: Lori Weis berg, staff writer for the San Diego UT. I want to welcome mat and Gary back into the conversation. What does her story tell us about the local housing market?
LONDON: I participated in lori's story. I looked at the numbers so i'm familiar with what happened here. Essentially she's right, the housing market moves as a glaciered pace. We saw one side of dynamics before 2005, and another after. The reason you saw some home ownership increase in some of these communities around downtown is because of condo conversions. A lot of the apartments were just converted to condos and condos were built. So you saw by virtue of the balance of the stock more home ownership. In the areas that were built up, the newer suburban areas like carmel valley, a lot of those homes arrived on the market at the wrong time. What we need to discern from this is that slowly, gradually, and correctly, there are going to be more renters in the market as a percentage of the over all home occupants, then there are going to be people buying particularly over the next ten years. We have a younger generation of people coming in, generation y, who are interesting adulthood and they're simply going to become renters like their parents. Inevitably that's gonna be a big demand for rental inventory prior to a demand for home inventory, ten years from now.
CAVANAUGH: They basically tell me there's a consensus at least among the two of you that the housing market was completely out of whack in the middle of the two thousands. Do you agree with that matt?
BATTIATA: I do. The biggest issue was -- a lot of people say the biggest issue that caused this was all these stated income loans. And actually i disagree. The biggest issue was the 100% financing. It's an issue now. When you have buyers who are getting FHA loans and putting two and a half percent down, think about that. If you buy a house and you put 3 and 1/2% down, and week you decide you need to sell it, you're upside down because it's gonna cost you more than 3 and 1/2% to sell it. That's the biggest issue. The banks need to bring back stated income loans because there's a lot of self employed people who need them who can't qualify now. The thing we need to keep in place now is that you need to put 10 or 20% down. That's what was out of whack in the early two thousands.
LONDON: The old fashioned way.
CAVANAUGH: 20% down.
BATTIATA: Or at least ten. You gotta have some skin on the game.
LONDON: That is what's going to happen. It's inevitable during the next phase.
CAVANAUGH: Bill is on the line from Chula vista. Hi bill. Welcome to midday edition.
New speaker: How Maureen, how are you guys?
CAVANAUGH: Just great. Thank you.
New speaker: A question, being that they're in the industry, i was one of those upside people, purchased in 2006, and basically I'd like to see my mortgage broker put in jail. But i don't think that's going to happen. I think there's an awful lot of fraud going on with the banks and these mortgage brokers who are too numerous to -- there's thousands of them out there that did this stuff. And yeah, no skip in the game. That was how you did it back then. At least that's what i was told by my mortgage broker who i trusted.
CAVANAUGH: Are you trying to modify your loan now, bill?
New speaker: I did try to modify it with -- i hope i can say wells†Fargo on the phone. I've been trying to modify with them for almost two years, and it was a big joke just like you hear. It's truly a joke, they're not going to modify you.
CAVANAUGH: Let me get a reaction to that, bill, because that is the craziest thing. We've been talking about that for over a year now with our real estate experts Gary and matt. And matt, can you weigh in as to why banks are offering loan modifications if indeed these loan modifications are not going through?
BATTIATA: I've been to capital hill four times over the last two and a half years. The government's put a lot of pressure on banks to modify people's loans. The banks are concerned about their public images. So the banks have simply -- they're going through the motions, tellingly people and the government we want to help you, we want to help you stay in your homes, modify your loans. Go through this be program. And the reality is, they draw out the process, and the number -- the percentage of people that trial get a loan modification is about 2%. Even of those 2%, the modifications that the banks do are such a band aid that the majority of those people still end up having to do a short sale or foreclosure. So the loan modification process that's gone on over the last few years, it's a travesty. It's a farce. And i hear it across the board. And the reality is that the banks are going through the motions to appease the government. That's the reality, and it hasn't changed.
CAVANAUGH: Would you agree with that Gary?
RIH1: I can't disagree with matt. He's on the ground. But i do agree. And -- listen, what's happening is that the banks don't want to modify because it's a bigger hit for them to do that. They're playing their own psychological game, which is what we've been calling extended pretend. They're hoping against hope that the market will get market and cure some of the deficiencies in the loans that they have out there. The longer the market doesn't get better, we're gonna have a continuation of the distress. We're sort of in that neverland right now, where we're not gonna see any changes of anybody's behavior, and no better numbers still we start to see some economic recovery.
CAVANAUGH: It's i chicken and egg situation. As you were saying, that you don't think the economy is really going to turn around until the housing market begins to pick up, and yet I've read people say, look, as long as we have high unemployment, the housing industry is not going to pick up.
LONDON: We have high unemployment because the housing industry hasn't picked up. I used to believe that the technology sector or some other sector could rescue the economy. But i believe the opposite right now. I believe that the reason the housing sectors does rescue the recovery is because it matters so much to our economy. It's a big multiplier for every job that's created in the real estate and housing sector, you get 2 or 3 jobs that are created in all other sectors. The automobile industry doesn't do that. So we're in that sort of cat and house game economically right now. We've got to allow the housing market to get back. The good news is that San Diego is one of perhaps a dozen region economies that will ultimately distress itself in terms of a housing shortage. That's the answer here.
CAVANAUGH: Just to get back to what you were saying, they keep seeing that real estate is the biggest investment for most Americans, it's a great wealth builder, and we're losing out on that engine.
BATTIATA: We are at the moment. But we are also coming up on a bell. Markets always over react. We had irrational exuberance when the market get crazy in 2004, 2005, now we're doing the opposite of the mas hysteria works that way. We're getting to a bottom. When we get there, in my opinion, it'll be the buying opportunity of our lifetimes here in San Diego county. We're just not there yet. But it's a cycle. And we go through these cycles over and over again. Every cycle --
CAVANAUGH: This severe though?
BATTIATA: Not quite this severe. This is a severe one. To me it was so obvious that it was coming. I couldn't believe it when i would be on panels and I'd have builders and realtors saying that this is San Diego, it's never gonna drop, everyone wants to live here. And even though the market has gone up so much, it's gonna stay. It's gonna plateau. We have these peaks and valleys over and over again. It's a painful process to go through, but it creates an amazing amount of opportunity when you get to a bottom. Think if you had bought a home in San Diego county in 95, and held it to the next peak. This isn't Iowa where the market stays baseline. We have these peaks and valleys and it makes for opportunity.
LONDON: I don't think you can ever know when the bottom really is. We may be at the bottom right now. I think that if you're a buyer with that 10 or 20% down or more, and interest rates are low, and you can get a loan, and you find the house that you want, you should buy it. And we -- if more people participated in that process, we'd have an economic recovery. And again, i have to restate something that's very important to both San Diego and to the coastal communities in California. We have a supply shortage. When we see economic growth here, we're not going to have the housing to supply to the households that are gonna come to take those jobs in the region. We are going to see a bit above housing. We just are -- we're not skilled enough as forecasters to know when and how much that's going to happen. If you have the opportunity to take advantage of this down point in the housing market, i wouldn't wait for a further down. I'd be out there shopping.
CAVANAUGH: Gary's advice is, if you're got the financing and you find a good priced house, buy now. What's your advice, matt?
BATTIATA: My advice is the same. If you're buying because you want a roof over your head, and you're gonna live in it for the long-term. It doesn't matter whether you buy now or a year from now. The other issue is the market by decline more, but then interest rates go up. So for the investor out there that wants to buy something to flip it, i see them down at the courthouse steps all the time, you can get yourself in a lot of trouble. I agree. If you're a weigher and you qualify and you want to be a homeowner, and you're gonna live in it for the long-term, of course. It's already a buying opportunity. And it is gonna stay that way for the next couple of years. If you don't have to sell, sit tight.
CAVANAUGH: I've been speaking with the struggles of the San Diego real estate market with matt Battiata, and Gary london. I want to thank you both.
BATTIATA: Thank you Maureen.
LONDON: Thank you.
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