Friday, May 19, 2006 | When Peter Dennehy, senior vice president of Sullivan Group Real Estate Advisors, started to outline San Diego County’s rather gloomy decline in home sales activity, a few sighs went up from the crowd of real estate industry players who had come to see him speak.

When Dennehy told the group – who were still sipping their morning coffees – that he was experiencing some pain as he tried to sell his Kensington house, those sighs turned into groans.

Slow sales and dropping prices aren’t normally the stuff of real estate industry presentations. If they are mentioned at all, they are usually quickly skipped over or tempered with a quick nod to other, more positive economic signs.

But the message from the San Diego-based Sullivan Group was simple: The housing industry, from Realtors to developers to builders, must adapt to weather the rough waters that are probably ahead for the real estate market.

Homebuilders must provide products that focus on quality, not quantity, urged Tim Sullivan, the group’s president. Gone are the days when cookie-cutter designs that scrimp on design will be snatched up by buyers who are eager to get into the home-buying frenzy, he said.

“Sameness is something that we want to get away from,” Sullivan said. “From subdivision to subdivision, there’s a large element of sameness. When you get an element of differentiation, through location, through the product, through your space, that’s how we battle a down market.”

Similarly, Realtors must be more aggressive in marketing the homes they are selling, Sullivan said. In San Diego, there are more homes on the market than ever before, and the local real estate industry has started to reintroduce incentives to sell new homes.

Developers have slashed prices in some cases and have offered to pay closing costs or add amenities to new homes to make sales more attractive to consumers. Sullivan said Realtors should use those incentives wisely, and hire salespeople who will really push their products.

Dennehy said San Diego’s buyers are currently sitting on the fence, waiting to see what happens to home prices and are very wary of buying at the peak of the market. He should know; he’s been trying to sell his house for a while and said he’s been struggling to tie down a buyer.

“We have reduced the price and now we’re very aggressive about marketing, and I think we will sell eventually – we’ve had one offer,” Dennehy said.

Sullivan touched on the issue of “exotic” mortgage financing as one possible concern. He said the number of interest-only loans that were taken out last year troubles him. For interest-only loans, the borrower only pays the interest on the mortgage each month for a set period of time, usually between five and seven years. Eventually, however, the payments on the loan kick up a notch.

Sullivan’s concerned about what will happen when the payments on all the loans taken out last year increase. If home prices do not rise significantly – and he doesn’t think they will – many borrowers with interest-only loans could be stuck with higher mortgage payments. Absent higher prices, the buyers won’t be able to refinance by cashing in on anticipated equity.

“It’s the loans that were taken out in 2005 that there’s an upside-down concern about,” he said.

However, if those borrowers had two- or three-year introductory terms, Sullivan said he expects many borrowers will manage to maintain their payments. He said those borrowers could be actually helped in the next few years if interest rates – and consequently mortgage payments – come down.

“That initial indebtedness trap may not be as painful,” he said.

If there’s one thing that is going to hurt the real estate market locally, Sullivan said, it’s the growing “fear factor” among the home-buying public.

Historically speaking, Sullivan said, this is a good time to buy. With few economic clouds on the horizon, plenty of homes to choose from, and discounts being offered left, right and center, there’s no reason why consumers shouldn’t be lining up to buy, he said.

But they’re not.

Fighting the pessimism that’s currently pervading the local community should be a priority for real estate industry professionals, Sullivan said. He thinks consumer confidence is going to continue to drop in San Diego for the rest of the year, and that consequently home sales will probably drop by a further 10 percent in the county.

“It’s a frustrating time for us,” he said.

Dennehy acknowledged that sales have slowed because buyers in San Diego are concerned about where prices are headed. That’s especially true downtown, he said, where he estimates there is currently a year’s supply of homes sitting on the market. He doesn’t foresee too many of the roughly 9,000 condos currently planned for downtown ever getting off the ground.

“Many, many of those projects will drop out,” he said.

Of the projects that are already being built or have recently been completed downtown, Dennehy said the most successful developers are implementing aggressive sales strategies. That includes properties such as The Legend, a project by Bosa Development that just broke ground next to Petco Park and recently opened a new sales office downtown.

Dennehy agreed with Sullivan, and said it’s time for the local real estate industry to get serious about the challenges to come. If that means putting forward frank statements about the market, then so be it, he said. In the long run, he said, it’s better to face those challenges head-on than to pretend they don’t exist.

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