Real Estate Experts Discuss Rise In San Diego Home Prices

TOP STORY ON MIDDAY EDITION, HAVE YOU CHECKED OUT THE PRICE OF HOMES AND CONDOS AROUND SAN DIEGO LATELY? ARE YOU SEEING MORE FOR-SALE SIGNS IN YOUR NEIGHBORHOOD. HOUSING PRICES AND INVENTORY HAD BEEN CREEPING HIGHER IN THE LAST TWO YEARS AND MORTGAGE RATES ARE APPROACHING ALL-TIME LOWS. HIGH REAL ESTATE PRICES COME A LOW MORTGAGE RATES, DOES THAT REMIND YOU OF ANYTHING? IT SEEMS TO HAVE TAKEN SAN DIEGO A SHORTER TIME THAN EXPECTED TO RECOVER FROM THE REAL ESTATE MELTDOWN OF SEVEN YEARS AGO CAN WE EXPECT THE NEXT REAL ESTATE BOOM TO TURN OUT BETTER THAN THE LAST? JOINING ME ARE DR. MICHAEL LEE, LECTURER OF FINANCE AND A FORMER DIRECTOR OF THE QUIRKY McMILLEN CENTER FOR REAL ESTATE SAN DIEGO STATE UNIVERSITY. AND WELCOME BACK. THANK YOU. AND CHRIS ANDERSON IS BOARD PRESIDENT OF THE SAN DIEGO ASSOCIATION OF REALTORS. WELCOME TO THE SHOW. THANK YOU. MICHAEL, HOW CLOSE TO THE PRERECESSION HIGHS ARE REAL ESTATE PRICES NOW SAN DIEGO ? ON AVERAGE, THEY ARE STILL SIGNIFICANTLY BELOW WHAT THE PRERECESSION HIGHS ARE. YOU HAVE TO DECIDE THAT A BIT. IF YOU LOOK AT HIGHER-END PROPERTIES, PARTICULARLY ALONG THE COAST, THEY ARE PROBABLY FAIRLY CLOSE WHEREAS IF YOU GO MORE INLAND AREAS THAT ACTUALLY HAVE A LOT MORE OF A BUBBLE AND HAD A BURST AS WELL, THEY ARE STILL SIGNIFICANTLY BELOW. NOW, CHRIS, THE PRICE OF CONDOMINIUMS AND TOWNHOUSES, OVER 15% HIGHER LAST MONTH AND THEY WERE THE SAME TIME LAST YEAR. WHAT'S CONTRIBUTING TO THAT JUMP ? WE HAVE HAD -- WELL THE LOW INTEREST RATES, PLUS WE'VE HAD LOW INVENTORY. THE NORMAL HEALTHY MARKET IS ABOUT A SIX MONTH WORTH OF INVENTORY WE ONLY HAVE 2.8 MONTHS. WORTH OF INVENTORY. SO THAT FUELS A BUYING FRENZY. BUT IT IS STILL HEALTHY BECAUSE THE SINGLE-FAMILY HOMES ARE ALSO MOVING UP. SO IT'S ALLOWING COUNT OH PURCHASES BECAUSE THOSE CONDO SELLERS ARE MOVING INTO SINGLE-FAMILY HOMES. SO IT'S A CYCLE WE SHOULD BE HAVING. WOULD YOU CHARACTERIZE WHAT IS GOING ON NOW AS A BUYING FRENZY ? I DO. NOT AS BAD AS IT WAS A FEW YEARS AGO. BUT THERE ARE MULTIPLE OFFERS ON ALMOST ALL OF THE PROPERTIES I SHOWED TO MY BUYERS. AND MICHAEL, YOU WERE SAYING THAT THIS IS NOT -- WE ARE NOT SEEING THIS -- THE PRICES GOING UP AÇAI IN ALL AREAS OF THE COUNTY. IS THAT HIGH -- RIGHT ? IT'S VERY MUCH A TALE OF NEIGHBORHOODS AND AS YOU LOOK ACROSS THE DIFFERENT ZIP CODES, YOU WILL FIND DIFFERENT RATES OF APPRECIATION, DIFFERENT RATES OF TURNOVER. AND THE COAST IS THE HIGHEST IS WHAT YOU'RE SAYING? MAKE SURE. THE LAND IS THE MOST SCARCE AND IS ALSO THE MOST VALUED BY CONSUMERS AND SO THAT -- NOT SURPRISINGLY THAT IS WHERE THE VALUE BE THE HIGHEST. LET ME ASK YOU BOTH STARTING WITH MICHAEL. IS SAN DIEGO WILLS -- EXPENSING A REAL ESTATE BOOM ? I WOULDN'T CHARACTERIZE IT AS A BILL. I THINK WE HAVE PASSED THROUGH RECOVERY AND WHAT WE'RE SEEING NOW IS PRICES WHILE ON A YEAR-TO-YEAR BASIS ARE STILL SHOWING DOUBLE-DIGIT, THEY ARE IN FACT SLOWING ON A MONTH-TO-MONTH BASIS. WE ARE GETTING BACK TO MORE OF A NORMAL SITUATION. BUT A NORMAL SITUATION IN SAN DIEGO IS GOING TO BE CHARACTERIZED BY LOW SUPPLY, LACK OF NEW BUILDING, AND STRONG DEMAND. SO THERE'S ALWAYS GOING TO BE PRESSURE FOR PRICES TO BE HIGH AND RISING. SO THAT LACK OF INVENTORY IS THAT WHAT YOU THINK, CHRIS, STOPS THIS FROM BEING A FULL-BLOWN BOOM ? NO. I THINK PEOPLE ARE MORE SAVVY NOW AND THE LOAN PRODUCTS ARE BETTER, SO THAT'S NOT GOING TO CAUSE THE BUBBLE WE HAD BEFORE. BUT I THINK IT IS HEALTHY, NOW. LAST YEAR, I WAS TALKING TO SELLERS AND THEY WERE BREAKING EVEN. THIS YEAR, THEY HAVE LITTLE BIT OF MONEY. SO THEY CAN MOVE UP OR THEY CAN MOVE OUT, INSTEAD OF MOVING OUT OF THE STATE, THEY ARE STAYING HERE IN THE STATE WHICH IS NICE. MICHAEL, COUPLE YEARS AGO, WHEN WE TALKED ABOUT HOME PRICES IN SAN DIEGO, THE EXPERTS WERE SAYING IT COULD TAKE 10-15 YEARS BEFORE SELLERS SAW THEIR PROPERTY VALUES COME BACK TO AROUND PRERECESSION HIGHS. WHY HAS THAT HAPPENED MORE QUICKLY ? AGAIN, IT'S HAPPENED MORE QUICKLY IN AREAS THAT HAVE LIMITED SUPPLY AND STRONG DEMAND. SO THAT'S WHY THE COASTAL AREAS ARE BACK BECAUSE THEY ARE JUST NOT VERY MANY LOCATIONS LIKE THAT. BUT WE ARE STILL WAY BELOW, NOT WAY BELOW, BUT SIGNIFICANTLY BELOW AS YOU GO INTO THE OUTLYING AREAS. THERE YOU PROBABLY HAVE ANOTHER FOUR OR FIVE YEARS BEFORE YOU GET TO THE PRERECESSION HIGHS. REFLECTING THE FACT THAT THAT WAS THE AREA WHERE YOU HAD A BIG RUN UP IN THE FALL. AND DO PRERECESSION HIGHS I GUESS WHAT I'M GETTING AT DO THEY REFLECT TRUE VALUE OF THE REAL ESTATE OR IS THAT AN INFLATED VALUE ? WELL, THERE'S A REASON TO THINK IT'S INFLATED. WE HAD VERY LOOSE MORTGAGE UNDERWRITING. YOU CAN BASICALLY GET A LOAN BY PASSING ABREAST ON THE MERE TEST -- MIRROR TEST. WE DON'T HAVE THAT SITUATION TODAY. I THINK THERE WERE SPECULATIVE DEMAND IN THE MARKET THAN THOSE DAYS. I THINK YOU DON'T SEE AS MUCH PEOPLE BUYING PURELY AS INVESTMENT SLIPS, THINGS OF THAT SORT. SO, CHRIS, IN YOUR ESTIMATION SHOULD WE BE CONCERNED OVER THE RECENT ACCELERATION IN PRICES ? NO BECAUSE YOU ARE LOOKING AT MONTH OVER MONTH AND WHEN YOU LOOK OVER A YEAR SPAN GIVES A BETTER SHOWING OF WHAT OUR TRUE MARKET IS. SO IT'S ALWAYS ACCELERATING AT THIS TIME OF YEAR. CYCLICALLY. THE MOST PEOPLE LIKE TO SELL THEIR HOMES WHEN THEIR CHILDREN ARE GOING TO BE OUT OF SCHOOL. SO YOU GET A WHOLE LOT MORE INVENTORY BUILDING AND MARCH, APRIL, MAY. JUNE IS FULL SWING AND THEN THEY WANT TO GET INTO A HOUSE BEFORE SCHOOL STARTS. EVERYTHING SLOWS BACK UP USUALLY AT THE END OF AUGUST AND SEPTEMBER AND THEN A LITTLE BIT OF SPURTS IN OCTOBER IN NOVEMBER AND DECEMBER IS USUALLY SLOW SO WE ARE COMING OFF OF THE SLOW MONTHS SO YOU ARE GOING TO BE ABLE TO SEE THAT OVER A YEAR SPAN YOU WILL GET A BETTER VIEW. MICHAEL, AT THE SAME TIME MORTGAGE RATES ARE NEAR HISTORIC LOWS. 30 YEAR FIXED RATE MORTGAGE, IT WAS AT 3.66% INTEREST RATES LAST WEEK. HOW DO MORTGAGE RATES THAT LOW AFFECT THE MARKET ? WELL, IT MAKES IT EASIER ALL THINGS CONSTANT FOR PEOPLE TO QUALIFY WITH THE LOAN OR VICE VERSA. YOU CAN BUY A BIGGER HOUSE AND GET A BIG ALONE ON THAT HOUSE FOR A GIVEN INCOME. DOES IT ACTUALLY HAVE THE FACTUAL AFFECT OF DRIVING PRICES HIGHER SINCE PEOPLE CAN'T AFFORD HIGHER PRICES GIVEN THE LOW INTEREST RATES ? IS AN ELEMENT IN THAT I WAS SAY IT CONTRIBUTES TO THAT. NOW, PEOPLE AT LOWER INCOME LEVELS CAN AFFORD MORE EXPENSIVE HOUSES AS MICHAEL WAS SAYING. WITH LOWER INTEREST RATES. IS THAT A GOOD THING, CHRIS ? WHAT I HAVE FOUND IS FOR EXAMPLE FOR THE FHA PRODUCT OR USDA, WHICH IS ZERO DOWN OR 3% DOWN, IF THEY BOUGHT TWO YEARS AGO THEY COULD ALREADY DO A STREAMLINED ON THAT LOAN AND REMOVE THE PRIVATE MORTGAGE INSURANCE AND THAT WILL GIVE THEM $3-$500 DEPENDING ON WHAT PRICE RANGE THEY ARE IN PER MONTH TO SPEND ON THEIR FAMILY INSTEAD OF ON THEIR MORTGAGE. SO I DON'T SEE THEM SELLING TO DO THAT AND TO CAPTURE IT, BUT WITH THEY ARE DOING IS LIVING MORE COMFORTABLY BECAUSE OF THESE INTEREST RATES. RECENT REPORT BY REALTOR.COM NAMED IN SAN DIEGO THE COUNTRIES LEAST AFFORDABLE PLACE TO LIVE. AND THEY MADE THAT DESIGNATION BECAUSE OF THE RELATIVELY SMALL PERCENTAGE OF PEOPLE WHO LIVE HERE WHO CAN AFFORD TO BUY A HOME HERE. CHRIS, IS THAT PROBLEM AFFORDABILITY -- IS THAT A DRAG ON THE REAL ESTATE MARKET ? I HAVE NOT FOUND IT TO BE A DRAG. WE ARE AMERICA'S FINEST CITY. SO I THINK THAT IS ALSO WHY. BUT WE DO HAVE THE CLIMATE THAT EVERYBODY WANTS AND WE ARE STILL AFFORDABLE IN THE BACK COUNTRY. AND AS YOU GO TO THE COAST, OF COURSE NOT. MORE AND WHEN YOU GO, THE MORE -- YOU GET PEOPLE FROM KENTUCKY, TENNESSEE, THEY USUALLY END UP GOING IN AN AREA THAT IS LIKE WHERE THEY LIVED, WHICH IS THE BACK COUNTRY AND THEY CAN AFFORD IT, STILL. SO IT'S NICE. WE HAVE HEARD FROM A REAL ESTATE PROFESSIONAL. [ LAUGHTER ] THAT WAS A REAL ESTATE PROFESSIONAL ANSWER. LET ME GO TO YOU, MICHAEL. THEY SPECIFICALLY NAMED US THE LEAST AFFORDABLE PLACE BECAUSE OF THE RELATIVELY SMALL PERCENTAGE OF PEOPLE WHO LIVE HERE WHO CAN AFFORD TO BUY A HOME HERE. SO DOES THAT DRAG ON THE REAL ESTATE MARKET ? IT'S A LIMIT ON THE REAL ESTATE MARKET, BUT WE ARE GOING TO BE IN A SITUATION OF LOW AFFORDABILITY FOR THE FORESEEABLE FUTURE FOR A COUPLE OF REASONS. ONE, WE ARE NOT BUILDING NEW HOUSES TO SPEAK OF. AND WE STILL HAVE IN MIGRATION, WE STILL HAVE DEMAND PARTICULARLY FUELED BY LOW INTEREST RATES AS YOU MENTIONED. SECONDLY, I THINK THAT WE'RE GOING TO HAVE LOW INVENTORIES FOR SALE FOR THE FORESEEABLE FUTURE. THERE'S A LOT OF PEOPLE WHO ARE LOCKED IN EITHER BECAUSE THEY HAVE HAD PAST APPRECIATION FOR THEY WOULD ACTUALLY HAVE TO PAY CAPITAL GAINS TAX IF THEY MOVE AND DECIDED THEY ARE NOT GOING TO. THEY MAY HAVE LOWER INTEREST RATE THAN WE HAVE NOW OR ONE THING I HAVE NOTICED IN MY NEIGHBORHOOD IS WITH A POPULAR [ INDISCERNIBLE ] I BOUGHT IN THE 80s AND I HAVE A VERY LOW BASIS IN MY PROPERTY VIS-À-VIS THE VALUE. SOMEBODY THAT IS LOOKING TO MOVE MAY NOT WANT TO HAVE THAT INCREASE IN THEIR PROPERTY TAX BASES. SO ALL OF THE FACTORS TEAM WE HAVE LOWER INVENTORY AND WE STILL ARE AN ATTRACTIVE CITY, THEREFORE PRICES WILL BE HIGH. IF HOME PRICES ARE NOT AFFORDABLE, THERE IS CONCERN THAT LENDERS WILL START TO OFFER SOME OF THE QUESTIONABLE LENDING PROGRAMS THAT GOT THE COUNTRY INTO THE RECESSION IN THE FIRST PLACE. WHAT DO YOU THINK ABOUT THAT? YES THINK IT'S INEVITABLE. I THINK THAT YOU HAVE A SITUATION WHERE LENDERS, THE CAPACITY IN THE LENDING INDUSTRY IS STILL SIGNIFICANT. AND IF THEY CAN'T GET A NEW -- ENOUGH GOOD BORROWERS THEY STILL WANT TO GET LOWS THEY ARE PAID ON A COMMISSION BASIS OR AS A CONSEQUENCE, YOU ALL ARE SEEING -- NOT WITH -- NON-BANK LENDERS RELAXATION AND DOCUMENTATION AND CLAUDICATION GUIDELINES. DO YOU SEE, CHRIS, INNOVATIVE LENDING INSTRUMENTS BEING OFFERED ON THE MARKET NOW TO PEOPLE WHO COULD NOT QUALIFY WITH A 20 -- STANDARD 20% DOWN ? NO. OTHER THAN THE USDA LOAN, WHICH IS A 0% DOWN, THE VA WHICH CAN BE ZERO AS WELL. OR THE FHA. I HAVEN'T SEEN THAT PRODUCT ACT ON THE MARKET WHICH IS IN MY OPINION VERY GOOD. BECAUSE THEY WERE NOT HEALTHY FOR US. AT ALL. SO I AM VERY HAPPY. THEY ARE GETTING MORE STRICT ON CERTAIN ASPECTS AND OUR ESCROW TIMES WITH NEW LEGISLATURE CAME INTO EFFECT IN APRIL WILL CAUSE US TO PROBABLY SLOW DOWN ON OUR PURCHASE TIMES INSTEAD OF BEING A 30 DAY ESCROW, YOU ARE LOOKING AT A 45 DAY. AND WHY WITH THAT ENSURE SOME SAFE -- MORE SAFEGUARDS IN THE MARKET ? BECAUSE IF THE LENDER CHANGES A PROGRAM, OR IF THERE'S ANYTHING THAT'S AMISS FROM WHEN THEY FIRST GIVE YOU THE DOCUMENTATION, THEY HAVE TO WAIT A 10 DAY OR 15 DATE PERIOD COMING UP. SO IF YOU ARE ABOUT READY TO GET YOUR LOAN DOCUMENTS AND SOMETHING CHANGED, WE HAVE TO WAIT AGAIN. FOR THERE TO BE ENOUGH TIME FOR THE CONSUMER TO ACTUALLY DIGEST WHAT HAS HAPPENED TO THEM. WE HAVE HEARD OF ALL SORTS OF LEGISLATION HAPPENING IN THE WAKE OF THE RECESSION AND THE REAL ESTATE BUBBLE AND THE COLLAPSE OF THE REAL ESTATE MARKET ACROSS THE COUNTRY, HAVE THERE BEEN, MICHAEL, ENOUGH SAFEGUARDS PUT INTO PLACE DO YOU THINK ? I THINK MOST OF THE CHANGES THAT HAVE COME FROM A REGULATORY AND LEGAL PERSPECTIVE HAVE ADDED A LOT OF COST AND AS CHRIS SAID, INCREASE THE AMOUNT OF TIME THAT TAKES TO CLOSE ALONE AND CLOSER REAL ESTATE TRANSACTION, BUT I ACTUALLY DO NOT THINK WE HAVE CHANGED A LOT OF THE FUNDAMENTALS. THE REASON I SAY THAT IS THAT WE HAVE AN INDUSTRY THAT HAS CAPACITY TO DO A LOT MORE LENDING BY -- VOLUME THAN THEY DO NOW. AT THE SAME INCENTIVES, THE LOAN OFFICERS, GROWTH -- BROKERS ONLY GET PAID IF A LOAN CLOSES. AND YOU HAVE A LOT OF INVESTORS THAT ARE LOOKING FOR MORE YIELD AND THEIR PRODUCTS THEN THEY CAN GET THROUGH THE TREASURY MARKET. SO THOSE FACTORS LEAD ME TO THINK THAT YOU ARE GOING TO SEE SOME RELAXATION AND YOU ALSO HAVE AFFORDABLE HOUSING ADVOCATES SAYING WE NEED TO LOSE IN THE GUIDELINES. SO SOME OF THE SAME FACTORS THAT LED TO THE LAST SET OF PROBLEMS I THINK STILL EXIST IN THE MARKET, JUST MUTED NOW. WHAT SHOULD WE WATCH OUT FOR THEN ? I THINK WATCHING OUT FOR SIGNIFICANT RELAXATION THING -- IN GUIDELINES, LETTING PEOPLE GET IN WITH LIMITED DOCUMENTATION, WHICH I DON'T SEE THAT HAPPENING YET. BUT THE LOW DOWN PAYMENT PHENOMENON, AND WHEN YOU LOOK AT SOMEBODY WHO'S GETTING AN FHA LOAN AND BASICALLY ONLY PUTTING 3% DOWN, THEY ARE UNDERWATER FROM DAY ONE BECAUSE IN ORDER TO TURN AROUND AND SELL THAT HOUSE, THEY ARE GOING TO HAVE TO BE PAYING MORE IN TRANSACTIONS COST THAN THEY WILL BE ABLE TO RECOUP. OVER TIME, THAT DISSIPATES BUT I THINK THAT HAVING PEOPLE HAVE MORE SAVINGS INTO THE PRODUCT MAKES A SAFER LOAN MARKET. CHRIS, WHEN YOU LOOK AT -- WITH ANTICIPATION TO THIS SPRING HOMEBUYING SEASON, I DO THINK IT'S GOING TO COMPARE TO LAST YEAR ? I THINK IT WILL BE SIMILAR, BUT I THINK WE WILL HAVE MORE INVENTORY THAT WILL BE ON THE MARKET SO IT MIGHT BE A LITTLE LONGER OF A TIMEFRAME THAN IT WAS LAST YEAR. IS THAT MORE ACROSS-THE-BOARD MORE INVENTORY WHEN COMES TO SINGLE-FAMILY AND CONDO'S ? YES, WHEN THE SINGLE FAMILIES BECOME AVAILABLE, IT ALLOWS THE CONDO SELLERS TO MOVE INTO A SINGLE MAC -- FAMILY, SO IT DOES MIGRATE THAT WAY. AND THEN THE HIGHER END MOVES IN AS WELL. SO THE HIGHER END WAS A STANDSTILL FOR MANY YEARS AND NOW THAT WE ARE BECOMING HEALTHY AGAIN, WE ARE ABLE TO HAVE ALL OF THE MARKETS MOVING. AND DO YOU, MICHAEL EXPECT TO SEE HOME PRICES CONTINUE TO RISE THROUGHOUT THE REST OF THE YEAR ? I DO. DO HAVE ANY SORT OF -- YES THINK MADE TO SINGLE DIGITS IN THE 5 TO 7% RANGE ON AN ANNUALIZED BASIS. OKAY. AND THAT IS WHAT -- IS THAT SOMETHING THAT WE CAN EXPECT AND WE CAN ABSORB IN SAN DIEGO? YES. ALL RIGHT. I'VE BEEN SPEAKING WITH DR. MICHAEL LEA AND CHRIS ANDERSON PRESIDENT OF THE SAN DIEGO ASSOCIATION OF REALTORS. THANK YOU VERY MUCH.