The outlook for San Diego's real estate and housing industry remains flat for 2009. A marked difference from last year's forecast is that the mid-priced housing units ( $500,000-$1,000,000 ) should experience steep declines whereas the low-priced housing stock led the way in 2008.
I compared my year over year prognostications, about the San Diego Housing market for 2009 and 2008, on Bloodhound Blog:
I think I underreached here. Four times median income is more reasonable for San Diego, which suggests a median price under $300,000. I was right; San Diego County’s median price hit $350,000 but I think I was softening the blow by stopping there.
I mentioned on another post, that weblog since disappeared, that the San Diego County housing market would bifurcate. I suspected that any income growth would happen on the top end and that the bottom half would see little to no income growth. Combine that with a liquidity crisis and the lower-end homes would get slaughtered while the upper-end would just decline a bit. That happened in San Diego County; lower priced homes are starting to make lots of sense right now.
Next year, I suspect we’ll see a convergence of housing prices as the higher-priced homes follow the lead the of the lower priced homes’ decline. The median price may very well drop but the lower-priced homes will hold value. The government is doing everything possible to provide liquidity to the lower end of the market but there will be NO financing available, over $625,000 next year. Watch Solana Beach, Encinitas, Poway and Scripps Ranch nose dive while the cash-heavy communities of La Jolla, Rancho Santa Fe, and Del Mar drop just a bit. Sell that duplex in Cardiff and buy a four-plex in Imperial Beach, if you’re an investor (I imagine Jeff Brown will tell you to just get the hell outta Dodge).
The key component to the housing recovery for San Diego remains in the ability for a home buyer to get financing. The US Treasury stepped in to provide financing for properties under $625,000, by:
(a) increasing the loan limits for FHA, conforming and VA loans to 115% of median price (expected Jan,2009)
(b) nationalizing Fannie Mae and Freddie Mac (guaranteeing the loan from default)
The luxury home market ($1,000,000 and above) is generally a cash market. As such, credit availability affects those housing units far less than the "rank and file" developments inhabited by those of us in the "working class". Expect SOME softness in the luxury home market but if the buyer likes the home, she'll either pay cash or have access to highly specialized financing available to the only asset-rich.
In 2008, I predicted that the median price would decline some 20-25% in San Diego County. While I didn't expect the mid-range housing stock to be affected by foreclosures, I did expect the lower-priced units to be the first to crumble. My exact quote, for 2008, was that "the rich will get not rich and the poor will get clobbered". That's EXACTLY what happened.
Communities like Oceanside, Vista, San Marcos, and Escondido in the North County declined as much as 55%, peak to trough. The entire South Bay experienced severe declines. Lower income areas of the City of San Diego and the East County experienced steep declines. Some areas declined so much that their prices have retreated to point where investment makes complete sense. The fundamental value of those properties, as measured by the price to rent ratio, is such that it's less expensive to own rather than to rent; we haven't seen that phenomenon in San Diego County since 1999.
Investors, looking to plunk 20% down and receive positive cash-flow, are finding that bank-owned homes, (as opposed to short sales), in distressed areas, are priced so well that they can achieve that objective. We work with real estate agents who are astute at identifying such opportunities and can help you if you are quick to act. We expect those opportunities to remain plentiful throughout the first half of 2009.
The cautious real estate buyer will avoid the mid-range priced homes ($500,000-$1,000,000) in San Diego throughout 2009. As more folks in mid-priced homes lose jobs, foreclosure activity will rise. The problem with that price range is that there will be little or no financing available for buyers due to the loan limit of $625,000. This means that if the mortgage payment on your Carmel Valley home, worth $1.1 million, is causing you financial discomfort, you'll be selling that home into a market where a willing (and well-heeled) home buyer can't get mortgage financing unless he puts a minimum of a half a million bucks down.
How many people do you know that have a half a million bucks liquid?
Communities like Poway, Scripps Ranch, 4-S Ranch,Rancho Bernardo, Rancho Penasquitos, La Mesa, Pacific Beach, Ocean Beach, Solana Beach, Carlsbad, Encinitas, and Cardiff may experience declines of 20-25% this year. The argument has always been that the homes near the Coast have special value and are somewhat impervious to a decline. The financing vacuum will prove that theory wrong next year. When financing for that $625,000 to $1,000,000 becomes available, expect those communities to quickly rebound quickly but...
...if "there ain't no money, there ain't no sale".
Fortunes are made in periods of chaos and unrest. Don't wait to scoop up bargains under $400,000; those properties are about as cheap as they're going to be. Stand ready to pounce on that $900,000 Cardiff home with the ocean view; you'll probably pick it up for $650,000 in June of 2009.