Monday, January 16, 2006 | Southern California home prices could decline by as much as 15 percent in the next two years, one of the region’s most prominent real estate analysts has warned.

Stephen D. Cauley, director of research at the University of California, Los Angeles Richard S. Ziman Center for Real Estate, also cautioned that San Diego’s downtown condo market has become over-saturated and could be in store for a serious downturn.

“That’s where you’re going to have a really big decline in values,” Cauley said in an interview.

Speculation has been rife about where property prices in San Diego are headed. After five years of unprecedented rises in value, the last few months have seen the market begin to cool. Nobody really knows what’s next: a “soft landing” for the market or a drastic dive. Other leading Southern California economists were more bullish than Cauley. When it comes to downtown San Diego, however, Cauley is not the only analyst who is concerned about the glut of condos.

There are currently 52 residential projects underway in downtown San Diego, said Russ Valone, president and CEO of MarketPointe Realty Advisors in San Diego. That’s a total of more than 11,000 condo units currently either being planned, approved or under construction. Currently, Valone estimates that there are 7,500 inhabited condo units in downtown.

Raphael Bostic, a real estate analyst at the University of Southern California, said Cauley is off the mark in his prediction for the real estate market as a whole. Bostic is predicting home prices will continue to rise gradually, at a rate of about 5- to 10-percent growth throughout 2006.

However, Bostic said the fast rate of development in downtown San Diego, coupled with a recent slowdown in sales, worries him.

“The condo market makes me nervous, because there’s been so much activity in that market, more so than just about any market in the country,” said Bostic. “Everyone’s done this mad dash to San Diego to get condos up, and I worry about saturation.”

The market for condos is always volatile, Bostic cautioned. The rash of development in downtown, coupled with a large number of speculators and investors entering the market, many of whom are now getting cold feet, could result in some significant price drops, he said.

Paul Tryon, CEO of the Building Industry Association of San Diego County said downtown San Diego now represents one-quarter of all the activity in San Diego’s real estate market, making downtown an integral cog in the region’s real estate machine. Tryon said the downtown market is certainly more vulnerable than the rest of the county, primarily because of the amount of speculation that has taken place there.

“You’re going to have more challenges in that market than you would find in some of the more traditional markets in San Diego,” he said.

That represents a concern, he said, but not a grave concern. And it’s not time for developers to stop building in downtown, as good developments will always be able to find buyers, he said.

Craig Gagliardi, a downtown Realtor, agreed with Tryon’s assessment. Nevertheless, Gagliardi said downtown is going to have to pay over the coming months for a market that has not accurately portrayed the demand coming its way.

“There’s a fairly large inventory of homes that are sitting on the market,” Gagliardi said. “There are a number of properties that are extremely over-valued.”

Those over-valuations, Gagliardi said, are going to have to come into line with the reality of the demand for homes in downtown. That may involve investors taking a hit, he said, but shouldn’t worry those who have bought in downtown with a view to living there long-term.

Although downtown San Diego may present one picture, the county as a whole does not need to worry, yet, according to predictions being made by other prominent economists.

Chris Thornberg, a senior analyst with the UCLA Anderson Forecast, said he is predicting a drop-off in prices, but not for some time. Thornberg foresees prices continuing to increase for the next six months, topping off in the middle of the year, and slowly beginning to drop toward the end of the 2006.

“The market’s clearly peaking right now,” said Thornberg, “and we’re clearly starting to go down the other side.”

Valone said price decreases have to be taken in their proper context. He argued that falling prices are simply not cause for concern for most homeowners in San Diego.

“The question is, is anyone really going to lose 15 percent?” Valone said.

To answer his question, Valone used an example:

“If I bought my house eight years ago in Rancho Penasquitos for $250,000, and the same house down the street in the same condition sold last July for $800,000. If I sell my house now for $750,000, I didn’t just lose $50,000.”

San Diego’s real estate agents couldn’t agree more with Valone’s view of things. Lew Breeze, a Realtor in San Diego’s Little Italy district, said “high-flying” economists have been predicting a housing “bubble” in San Diego for the last five years. He’s been tracking those forecasts since 2002, he said, and they’ve simply played into the hands of Realtors and their clients.

“I think it’s kind of good that everybody says that. When people think the stock market’s going to crash and crash and crash, it doesn’t,” he said. “It’s when you don’t think it’s going to crash that it surprises you.”

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