Frenzy, Deadlines and Price Increases Keep Market Murky

Frenzy, Deadlines and Price Increases Keep Market Murky

A banner outside the Solara Lofts in downtown San Diego advertises the availability of government-backed financing for condo purchases. Photo: Sam Hodgson

Tuesday, Oct. 27, 2009 | Housing prices in San Diego County rose again in August, rounding out a summer of monthly price gains, according to data released Tuesday.

Prices rose a seasonally adjusted 1.52 percent between July and August, the Standard & Poor’s/Case-Shiller home price index showed.

Though prices in August were still down 8.85 percent from the same month in 2008, that year-over-year gap has been shrinking, reaching single digits for the first time in nearly two years. Those gaps were larger than 20 percent for more than a year of the downturn.

“It seems to me that it is the process of turning around,” said Lynn Reaser, president-elect of the National Association for Business Economics and chief economist at Point Loma Nazarene University. “The lower end in particular seems to have turned a corner.”

But these slight increases for a few months come in the shadow of an extraordinary downturn that left the economy reeling. As of August, local housing prices had fallen 38.75 percent from the market peak in November 2005, reaching a level last seen in November 2002.

Even though the bleeding has subsided, the future for San Diego’s market and surrounding economy remains murky. The sense that prices have stopped falling fuels a frenzy in the market. Adding to the momentum: a looming deadline for a federal tax break incentive for first-time homebuyers and attractive interest rates, luring more buyers into the ring and increasing demand.

But the end of the tax break offer, a continuing stream of rising foreclosures and a still-weak local economy could sap that momentum. The monthly economic index produced by University of San Diego economist Alan Gin showed a sixth straight gain in September. But even a gain, driven by increases in local consumer confidence, building permits and an improving national economic outlook, does not mean Gin expects an imminent recovery.

“The outlook continues to be for the local economy to remain weak for the rest of 2009 but to hit a bottom in the first half of 2010,” he wrote in his index released Tuesday. “This is in terms of jobs and employment, which typically is a lagging indicator.”

The future of the market hinges somewhat on what happens once the government stops intervening. Real estate interest groups have been loudly lobbying the federal government to extend the $8,000 tax credit past its current Nov. 30 deadline, arguing its disappearance could pull the rug out from under the stabilizing housing market. Already, local real estate agents are eying this weekend as a turning point. It generally takes about a month for a sale to close.

The question is: will the frenzy subside after the deadline passes?

“Following this weekend, there’s going to be a perceived drop in demand from buyers who were saying, ‘Hey, I can close by the end of November,’ or just — ‘Hey, let’s just wait a few more months and see what happens,’” said Dan Cassidy, a Hillcrest-based real estate agent.

The tax break is hardly the only government piece of San Diego’s stabilizing housing market. When private investors fled the mortgage market, the government tried to pick up the slack by funding more home loans that require just 3.5 percent downpayments.

As a result, nearly one-third of the homes purchased here in August and September were financed with a Federal Housing Administration loan, according to MDA DataQuick.

That’s a huge jump from just two years earlier in August 2007, when only 0.8 percent of the homes purchased in San Diego County were bought using an FHA loan. Beyond that, the federal government has been investing heavily in making mortgages available, an investment that is due to start phasing out next spring.

“At some point the housing market will have to stand on its own two feet,” Reaser said.

At this point, after fighting for months to get a house, writing offer after offer to compete with cash investors, some buyers are giving up. Others are getting more resilient.

“Man, people are tired of this,” said North County broker Jim Klinge. “People are pickier — I think they figure if they’ve come this far, there’s no way they’re going to settle now.”

But Klinge said most buyers wouldn’t be affected by the disappearance of the tax break. When it comes to signing contracts and winning bidding wars, some buyers right now are willing to pay up to 5 percent more than they think the house is worth, just to be done with the process.

“I don’t think it’s even about pricing anymore,” he said. “I think pricing is taking a backseat to acquisition.”

Carlsbad-based mortgage consultant Sheldon Ruckens said he’s talked some buyers out of buying because they’re spending much more than the tax break just to take advantage of it.

“I tell people you’re probably paying $20,000 or $30,000 more than you would next year just for $8,000,” he said. “It’s not a matter of right or wrong, it’s a matter of understanding what you’re doing.”

The Case-Shiller index showed month-over-month gains in all three of its price tiers, in both the regular and the seasonally adjusted versions of the index.

The low tier, homes priced under $281,769, rose 2.45 percent from July but had fallen 50.2 percent from the tier’s peak in June 2006.

The middle tier, priced between $277,598 and $427,404, rose 1.6 percent from July but was down 38.29 percent from the tier’s peak in November 2005.

The high tier, homes priced higher than $427,404, rose 0.26 percent from July, but was down 30.07 percent from the tier’s peak in June 2006.

Please contact Kelly Bennett directly at kelly.bennett@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Follow her on Twitter: twitter.com/kellyrbennett. Or set the tone of the debate with a letter to the editor.

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