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Friday, July 14, 2006 | While the news that home prices finally went negative year-on-year last month grabbed plenty of attention this week, a new report shows that the price dip has been even more exaggerated for condos and townhomes.
When compared with June 2005, median prices dropped $20,000 in the county last month for single-family attached homes, a category that includes condos, condo-conversions and townhomes. That’s a 5.2 percent drop over the year. The prices also decreased by 2.4 percent from May to June and 5.7 percent from the beginning of the year, according to HomeDex, a resource compiled by Dr. Robert Brown, professor of economics at California State University, San Marcos.
As usual, those in the industry are divided over what the numbers mean, with some predicting a calming of the market and others seeing a potential crisis. Many real estate professionals and analysts view the change as the attached housing market starting to return to normal after the escalating prices of the last few years. Others aren’t so optimistic.
Realtor Jim Klinge, who has been in the realty business for 22 years, said the current conditions are unlike anything he’s seen before.
“It’s anything but normal, if you ask me,” Klinge said.
John Karevoll, a housing analyst with DataQuick Information Services, said the market is returning to normal.
“I don’t think things are as grim as some say they are,” he said.
Chris Thornberg, an Anderson Forecast analyst at the University of California, Los Angeles, said the housing market is in uncharted territory. Thornberg attributes the “everything’s fine” response from the realty industry to the “bunker mode” mentality that comes in circumstances like these.
“People are loathe to realize losses in homes,” Thornberg said. “They don’t want to talk about it, to think about it.”
Thornberg said that these numbers aren’t evidence of a soft landing.
“The industry has been really blase,” he said. “This cooling off of the market is very, very hard and very, very fast – more than we’ve seen before.”
The people most impacted by these shifting prices in condos and townhouses are those who purchased condos over the past two years and did so by stretching their budgets, said Gary London, president of London Group Realty Advisors in San Diego. Those buyers are typically first-time buyers, London said.
“So, by definition, they would be starting out their run on the housing ladder, house-poor,” London said.
“But my sense is that will represent a relatively small portion of the market,” he added.
The lower prices have also had an impact on the rate of production undertaken by San Diego builders and developers.
“We’re beginning to take a pause from that heated market,” said Paul Tryon, CEO of the Building Industry Association in San Diego. “It’s a repose, a rest.”
In the market heyday in recent years, builders held back on production of detached homes, but overcompensated and “got a bit crazy” in the condo market, said Alan Gin, professor of economics at the University of San Diego’s Burnham-Moores Center for Real Estate.
“They were counting on condos being new starter homes,” Gin said. But, he thinks the changing prices will lead first-time homebuyers to wait until prices drop low enough for them to afford a detached home.
That reluctance to jump into the market will reduce the demand, and will thus reduce the prices, even further, Gin said.
While marked decreases in the median prices of single-family attached homes were noticed in all areas of San Diego in June, South County experienced the largest differential, with decreases of 11.3 percent from the same month last year, 12.6 percent from January and 7 percent from last month. That’s a year-on-year price drop of more than $40,000.
Those decreases are hitting home for several of Chula Vista Realtor Dawn Lewis’s clients, four of whom are what Lewis calls “short sales.” These are people whose initial home loans were for a higher price than their homes are currently worth. She said most of her clients in this position are getting out of the condos any way they can, even if they don’t walk away with any cash.
“They think it’s better to cut their losses now than to wait to see what happens later,” she said.
Lewis said she’s even willing to take less on commission if it means finding these often desperate clients a way out.
Sellers have noticed the drop in prices but they also recognize that prices are still just out of reach for many potential homebuyers. Builder incentives and price reductions, often about $20,000, accompany nearly every condo sale in the current market and have taken the place of upgrades and gimmicks that used to help sellers close a deal, said Peter Dennehy, senior vice president for Sullivan Group Real Estate Advisors.
“People are saying now, we need more help making our monthly payments than we need granite countertops, flatscreen TVs and that sort of thing,” Dennehy said.
And those price reductions are encouraging first-time buyers, he said, though he warns against people buying condos as an investment, hoping to make money. However, he expects a strengthening of the market in the long term.
“The first thing I ask people is why do they want to buy a condo,” Dennehy said. “If someone is wanting to live downtown and doesn’t want to pay rent, then I would say, ‘Absolutely, now is the time to buy.’”
Chris Redfearn, an analyst with the University of Southern California’s Lusk Center for Real Estate, agrees with that synopsis. San Diego, especially downtown, will benefit from the aggressive underwriting and investing in condos, he said.
“If they’re built, people will live there,” he said. “With the construction of the ballpark and the people moving in there, you’re going to get a vibrant community. The original investors may get hammered. But ultimately, downtown is going to become a great place.”
Darren Moore is a 34-year-old condo-owner living in La Vita, a condo building at Beech and Cedar streets in Little Italy. He bought his condo for $459,000 in February 2005. It has appreciated to $702,000. He doesn’t put too much weight in the appreciation, though. Ultimately, he thinks real estate should be about finding a place to live, not about making an investment speculation.
“Everyone’s got the ‘now’ perspective,” he said. “But in the end, this is San Diego. It’s the place to be.”
– Staff writer Sam Hodgson contributed to this report.