Thursday, July 13, 2006 | It’s been nearly 10 years since the median sales price of homes in San Diego dropped year-on-year.

Coming after a few years of unprecedented home price gains, the price drop doesn’t surprise analysts. But some experts are worried about what the depressing news could do to consumer confidence and what effect it could have on new homebuyers, many of whom bought using so-called “creative loans.”

The median price at which homes sold last month was 1 percent less than a year ago, according to figures released yesterday by DataQuick Information Systems. The last time prices fell over a year was from July 1995 to July 1996. Realtors have continually used the year-on-year price gains as evidence that real estate is a good investment, but investors and homeowners in San Diego may be feeling the pinch recently.

“There’s an awful lot of people out there who just don’t feel as rich these days,” said John Karevoll, an analyst with DataQuick. “Over the past five years, most San Diego homeowners have made more money owning their home than they’ve made at work.”

Take away that extra income, said Alan Gin, a professor of economics at the University of San Diego’s Burnham-Moores Center for Real Estate, and you’ve got less money flowing into the local economy. Lower home prices means there are also less people willing and able to tap the equity in their home to finance big ticket purchases, which also has a knock-on effect on consumer spending, a major driver of the economy.

Chris Thornberg a senior economist at the University of California, Los Angeles Anderson Forecast, said dropping home prices can have a powerful psychological effect on homeowners.

“When your house keeps appreciating by 10 or 20 percent a year, easier to buy that nicer bottle of wine, perhaps go out to that slightly fancier restaurant – what the hell, right?” Thornberg said. “But when that goes flat, suddenly, oh geez, the house isn’t going to be this big boom of new wealth. Boy, I’m going to have to be a bit more careful with my dollar.”

But neither Gin nor Thornberg is overly worried that year-on-year home price changes have crossed into negative territory in San Diego. A 1-percent drop is insignificant at this point, Gin said, and there will have to be larger, more sustained home price drops before he starts predicting doom and gloom for the housing market.

Both Gin and Thornberg described the drop in prices as “statistical noise.”

The year-on-year median home sales price changes have been positive for a decade, but the last few years have seen particularly striking gains. Many months in 2004 saw double-digit year-on-year price rises, with the boom peaking in October 2004, when prices were 24 percent higher than a year before.

But those increases have been eroding away since that peak, and in May prices were just 0.4 percent higher than a year before. Despite slight rallies, the trend has been one of falling prices.

Gin said he can’t see anything in San Diego’s future that’s likely to buck that trend.

“I think job growth will be solid, but I don’t think it will be spectacular – not big enough to drive prices upward,” Gin said.

Analysts said the price drop has to be a concern to one particular group of people: the majority of people in San Diego who bought homes in the last couple of years using so-called “creative financing.” Last year, close to 80 percent of new home purchases were made using interest-only or negative-amortization loans.

With interest-only loans, a borrower only pays off the interest on their loan every month for an initial time period. With negative-amortization loans, the borrower actually pays less than their interest payment each month, meaning that the amount they are borrowing grows over time. In both of these types of loans, the low introductory rates only last a few years before kicking up substantially.

The introductory monthly payment periods on most of those loans will be running out in the next few years, meaning many local homeowners will find their payments increasing substantially. Those who were counting on using the built up equity on continued price increases to manage that increased payment could face troubles.

Anyone who bought in the last couple of years banking that their property will increase in value substantially should be concerned by these figures, Karevoll said. He said if that turns out to be a large chunk of new homeowners in San Diego and elsewhere, and if home prices continue to fall, there could be serious repercussions for the economy.

Add price decreases to the large number of exotic loans out and mix in any sort of additional stress on incomes – a recession for example – and Karevoll said the results could be disastrous for California and elsewhere.

“There could be a bloodbath,” he said.

That’s a lot of if’s, however, and Karevoll’s not predicting prices are going to fall too far. Indeed, he believes year-on-year median price changes are going to “wobble” between slightly positive and slightly negative for the next few years at least.

That synopsis was backed up by Peter Dennehy, senior vice president of Sullivan Group Real Estate Advisors. He said the drop in median prices is merely due to sellers getting real about the fact they’re in a buyer’s market.

There are currently 22,890 homes listed for sale in San Diego, according to real estate brokers ZipRealty. Dennehy said sellers are starting to realize that if they want to sell their home, they’ll have to drop their price.

Please contact Will Carless directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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