Price Declines Slowing, But Recovery Still Appears Distant

Tuesday, July 28, 2009 | In a recession marked by major weakness in the housing market, this passes for a hint that the market might be regaining muscle: Home prices, though still falling, are slowing their descent.

But even when home prices — and other indicators for the surrounding economy — stop falling, the time when they again climb looks distant.

San Diego County home prices were down 18.52 percent from a year earlier, according to the most recent Standard & Poor’s/Case-Shiller index for May, released Tuesday. The year-over-year declines have been shrinking every month since January.

In the three-and-a-half years since the market’s price peak in November 2005, prices have fallen 42.05 percent to a level last seen in summer 2002. Still, prices remain 45 percent higher than they were at the start of the decade.

Even while price declines are slowing and the number of homes for sale has been slashed, foreclosures are rising and unemployment remains a significant issue. The housing market is segmented, split by geography and price, with frenzy on the low end contrasted against softness at the top. It all conflates to make forecasting the regional economy extremely difficult.

But the local recession that began with the slump in the local housing market could bottom as soon as next year, early indicators are beginning to portend. The local economy rose slightly in June, according to the latest monthly index released Tuesday by economist Alan Gin at the University of San Diego.

It was his index’s third consecutive rise after being down for 24 months straight. Economists typically look for three consecutive months in a particular direction to indicate a trend, but Gin said it’s not necessarily a “hard and fast” indication of a turnaround.

On the upside, four categories buoyed the index: consumer confidence, building permits, local stock prices and a national economy outlook. But unemployment and a dearth of companies posting help wanted ads exerted strong drags on the index, keeping it to a very slight gain over May. The forecast is hedged for that reason — Gin said a bottom to the trouble in the economy could potentially come as soon as the first half of 2010.

“It’s a mixed message from me, even though this is positive,” Gin said. “Even if we hit that bottom, I think that rebound off the bottom is going to be quite weak. [The monthly readings] haven’t been up very much compared to how dramatic it was on the downside. We could be flat for some time.”

One of the biggest factors for economic recovery in San Diego remains the housing market, which itself is tough to read. Even as sales counts have been rising for 12 months, and price declines have been slowing, the flood continues of homeowners defaulting on their monthly mortgage payments.

Lenders filed 7,345 notices that homeowners had entered or reached a new stage of foreclosure in June, according to tracking firm RealtyTrac. That marked an 18.6 percent rise from the same month in 2008.

The stock of pent-up possible foreclosures is growing. In May, 7.6 percent of San Diego County homeowners with mortgages were at least 90 days late on their payments, a significant increase from the 5 percent of homeowners in that position a year earlier, according to FirstAmerican CoreLogic.

That’s more than the 2.6 percent share of local homeowners who had received formal notice of being in foreclosure in May.

Though these countywide data give some sense of trends in local housing, the market is not a monolith. The bidding wars on the bottom of the market — especially homes priced $350,000 and below — pose a sharp contrast to softening prices in the upper echelons, where sellers lose buyer after buyer to issues with finding loans for such high amounts. New rules to regulate how appraisals are done have added yet another wrinkle to the effort to close sales.

“A different thing is going on in La Jolla than is going on in Chula Vista,” said Don Rood, real estate broker at Bonanza Realty in Point Loma. “A different thing is going on in the million dollar market than on the lower end.”

Rood had two buyers fall out of a deal to purchase a home near Sunset Cliffs for $1.050 million when an appraisal came in at $975,000, even though the buyers had been willing to pay the higher amount, he said.

Contrast that trouble selling a million-dollar property to this: Rood was scheduled on Tuesday afternoon to take a client to view a home in North Park that was listed as a short sale for $165,000. But when he called the listing office for more information, they told him the home already has received 30 offers. Rood’s client decided not to enter that fray.

“I could just tell you story after story of writing offers over list price and not even getting a call back,” Rood said.

Jeffrey Douglass, owner and broker at downtown-based RealtyV2, said he’s never seen a market like this one in his 20-year career.

“Right now it’s the wild, wild west out there, if you will,” he said. “It’s a bifurcated market — inventory in the lower prices is extraordinarily tight.”

Active listings on the market numbered 10,034 on Tuesday, as measured by Sandicor — less than half as many as were on the market last summer.

Though a tightened supply and an increased demand might typically indicate underlying strength, this market has too many issues to say for sure, said Mark Goldman, mortgage broker and real estate professor at San Diego State University. And even a flattening of prices doesn’t mean they’ll make any sort of turnaround any time soon, leaving neighborhoods full of homeowners who owe more than they could sell for.

“I don’t like to be Dr. Doom in the housing market,” he said. “We’ve taken most of our licks, but what’s going to cause the market to improve?”

One major concern is the scarcity of private funding for mortgages, he said. The market for mortgage financing has significantly dwindled to leave the federal government buying the lion’s share of the nation’s mortgages — but that is due to change at the end of 2009, he said.

“I think real estate has some uncertainty that is difficult to forecast at this time because the main thing in real estate is the money, and the mortgage market has a lot of unresolved issues,” he said.

Still, Goldman said, with the potential for inflation on the horizon, a homebuyer could do well to buy a discounted home and lock in a mortgage at the interest rates in today’s 5 percent range.

“I just see a bunch of stuff going on that can become a concern, but is now a good time to buy a home? Hell, yeah,” he said. “Will prices slide some more? Yeah, they will.

Are they going to slide a lot? No.”

Those price slides showed up across the board in May’s Case-Shiller index.

Comparing prices to the same month last year, all three tiers (based on low-, middle-, and high-priced sales) in the region showed slowing declines.

The lowest tier, homes priced under $266,912, fell by 23.54 percent from May 2009. From that tier’s peak in June 2006, prices have fallen 52.6 percent.

The middle tier, homes priced between $266,912 and $398,179, fell by 15.48 percent year-over-year and by 40.93 percent from the peak in November 2005.

And the highest tier, homes priced higher than $398,179, fell by 15.81 percent year-over-year and by 32.75 percent from the peak in June 2006.

The overall index showed the first month-to-month rise for home prices since June 2006, with May’s 0.44 percent increase over April. But a seasonally adjusted version of the index, released to account for normal ups and downs in the year, showed a 0.27 percent decline in the same period.

Gin said he expects a long flat period for the local economy even if the bottom for the local economic plunge comes early next year.

“I think it’s a sign that the bleeding is about to stop, but the patient’s got a long recovery ahead,” he said.

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.