‘This Year, the House Collapsed’

Wednesday, Dec. 31, 2008 | The local housing market sustained a 27 percent drop in prices between October 2007 and October 2008, according to the latest installment of the Standard & Poor’s/Case-Shiller index, released Tuesday.

This index comes at the end of a slump year typified by foreclosure distress and dropping prices. Now displaying further pressure on the housing market from the global financial crisis, the new data joined a slew of recent numbers portending that a housing market recovery could be distant.

Analysts prognosticating the market in the coming year range from optimists hoping for a stable market by mid-year, to pessimists expecting much more pain from foreclosures and weak demand for housing through 2009. The uncertainty comes largely from rising unemployment and underemployment in the region, as tumult for workers bodes poorly for potential home purchases.

The pain is felt to varying degrees nationwide. San Diego was one of six metropolitan areas measured with an annual decline of more than 25 percent — coming behind Phoenix, Las Vegas, San Francisco, Miami and Los Angeles. Three new markets broke the double-digit barrier for the first time in October — Seattle, Atlanta and Portland, each with year-over-year drops of more than 10 percent for the first time.

Here, the lowest-priced homes fared the worst in terms of falling prices. Detached houses priced less than $317,768 fell by 32.7 percent year-over-year and by 45.8 percent compared to that tier’s peak in June 2006.

The middle tier, homes priced between $317,768 and $469,174, dropped by 24.5 percent year-over-year and by 35.8 percent from the tier’s peak in November 2005.

And the highest tier, homes priced higher than $469,174, fell by 19 percent year-over-year and by 28.1 percent from the peak in June 2006.

Though a widely used indicator of market health, the Case-Shiller index lags the current market considerably, as it tracks sales that have closed in a rolling three-month period. So this installment measures detached houses that closed escrow in October, September and August — usually opening escrow a month or two earlier than that.

Future installments of the index will display the impacts of the major national economic stress that hit in force in September and October.

The index assigned a value of 100 to the region’s home prices in the year 2000, and has tracked the ups and downs in the market compared to that value ever since, on homes that have sold at least once before. The peak of the market in November 2005 was a reading of 250.34 on the index, meaning prices had ascended by 150 percent in less than six years.

This most recent index for October shows a reading of 159.12, a decline of 36.4 percent from the peak. Still, the index shows prices to be about 59 percent higher than they were at the start of the decade.

The trouble in housing and its spillover effects in the rest of the economy have many analysts expecting continued slump in 2009.

Alan Gin, economics professor at the University of San Diego, searched for a suitable saying for the coming year and came up with “Things will be not-so-fine in ’09,” a slogan he delivered during his outlook on the local economy at USD’s recent annual real estate market gathering.

With job losses continuing in construction and real estate, and the ensuing job losses in retail, Gin’s index of local indicators has grown quite gloomy lately, falling by its greatest amount ever in October and its second-greatest in November.

At the end of 2007, Gin started to expect the trouble in housing would seep into the rest of the economy. But its extent this year still surprised him, he said.

“Last year’s problems were like termites,” he said. “This year, the house collapsed.”

It’s not the first time San Diego and California have been hard-hit by the collapse of a bubble, Ryan Ratcliff, Gin’s colleague at USD, pointed out. He showed a recent history of booms in the state and national economies, including the aerospace sector in the 1990s, the dot-com surge in 2001 and the housing market boom this decade. California has a good track record in terms of innovation in hot-ticket sectors, but when they start to cool, the state is left overexposed, he said.

“As bad as it is in the U.S., it’s worse here,” Ratcliff said. “I can’t see the light at the end of the tunnel for the California economy, as much as it pains me to say that.”

The best he could muster for good news, he said, was an expectation that home sales will pick up as buyers seek deals on foreclosures and short sales. Ratcliff himself bought a bank-owned home in Rancho Peñasquitos earlier this year.

Gin forecasted another 10 percent drop in the Case-Shiller index in 2009 and said he doesn’t expect a “bottom” in the market until at least the end of the year.

Please contact Kelly Bennett directly at kelly.bennett@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.