Market heading up or down? It depends on whom you ask

By Emmet Pierce and Lori Weisberg
UNION-TRIBUNE STAFF WRITERS
January 18, 2005

RONI GALGANO / Union-Tribune
Susan Marshall and Paul Devine watched their 11-month-old son Miles crawl in the front yard of their Normal Heights home, which they plan to sell next month.

With San Diego County's booming housing market showing signs of a slowdown, consumers are getting mixed messages about whether to expect a return of runaway prices, a steep drop in real estate values or something in between.
While the region can look forward to continued appreciation in housing prices, the customary annual gains of 20 percent and more are likely to taper off to more moderate levels this year, according to real estate professionals and most economists.

There is, however, a contingent of dissenters who say that housing prices will drop. Should that occur, the consequences could be greatest for heavily leveraged homeowners, who are counting on rising values to make large investments pencil out.

"We still have a shortage of housing, and as long as you have a shortage, the supply and demand factor kicks in," said longtime real estate agent Marjorie McLaughlin. "You probably won't see the huge jumps in appreciation we've had. It might be more like 6 to 8 percent per year."

San Diego County could be in a more precarious position than other areas because the most recent home buyers have relied on adjustable-rate loans, typically with low-cost introductory rates.

If home values start to slide and mortgage rates rise, those who bought at the peak of the market may find themselves unable to refinance their adjustable-rate loans, experts say.

Economists are predicting that interest rates this year will rise as much as 1 percentage point from their current level of about 5.7 percent for a 30-year, fixed-rate loan.

Anthony Downs of the Brookings Institution is advising Californians who are thinking of selling to do so quickly while the market is at or near its peak.

"I can't believe we can sustain this 20 percent annual increase," he said. "In the state as a whole since 1999, the median price has gone up 123 percent. That is three times as much as the country as a whole. Incomes have not gone up much at all."

Yale economist Robert Shiller, author of "Irrational Exuberance," is known as a naysayer who often gets it right. He says home prices here are poised to drop and he dismisses arguments that the low housing supply and diversified economy will keep prices strong. The gap between rising home costs and largely flat wages is so great that a sharp correction is inevitable, he said.

What pessimists fail to take into account, however, is the strong desire to live in Southern California, said Lawrence Yun, senior economist with the National Association of Realtors.

"Many contrarians who worry about the Southern California market will look to data like income but what they can't pinpoint is the desirability of living in California as opposed to living in Buffalo and Cleveland," he said. "And the migration trend has been toward warmer climates."

While prices in San Diego County continued to climb last year, the inventory of homes started to grow in the last half of the year, forcing some sellers to lower their prices. Consumers can expect more of the same this year, said agent K.J. Koljonen.

"I predict it's going to be more buyer-friendly where you can negotiate these deals and sellers don't hold all the cards," Koljonen said. "Buyers are in a position to negotiate a better price and come in lower on their offers. Sellers aren't getting top dollar now."

Tim Federighi, a veteran San Diego County real estate appraiser, maintains that the market has peaked. He sees signs of a sharp downturn in 2005.

"My gut feeling is we are going to have a market correction," he said. "The question is how long and how severe? When the median price is over $500,000, you are starting to price people out of the market. People can't afford the one thing everyone dreams of owning, and that's a home."

The University of California Los Angeles's Anderson Forecast rattled the real estate industry recently when it said San Diego County was experiencing an inflated real estate price "bubble" and that prices were due to drop. The full effect of that decline may not be felt until 2006, said UCLA economist Edward E. Leamer.

This year "will not be the year of pain," he said. "You can expect more problems in 2006 we believe; 2005 will be the slowing down of the overheated real estate sector."

However, University of Southern California economist Raphael Bostic disputes predictions of a housing bubble ready to burst. He believes demand will continue to outstrip supply, leading to an upward pressure on prices.

"The increase in mortgage rates will slow the rate of appreciation in the market. The question is, will it slow it by enough to where prices will actually fall," said Bostic, of the USC Lusk Center for Real Estate. "We're not likely to see that happen because excess demand has been so great and appreciation rates have been so high, we'd have to see real economic dislocation at a macro level."

Bubble or no bubble, Paul Devine and his wife, Susan Marshall, say they have to sell their tiny Normal Heights home and buy a larger house now that they have a baby. The continued run-up in housing prices does not concern them, although they know they need to look in areas of the county where they can get more for their money.

"The way I look at it, if you're planning to keep the house for a long period – more than 10 years – you're not affected by these short-term corrections," said Devine, who hopes to get as much as $440,000 for the 720-square-foot home he and his wife bought five years ago for $189,000.

"Our plan is to buy a house big enough for two kids, and that will hold us over for 10 years. If the market were to totally fall through the floor, we could continue to afford it. The value of the house is only the value the day you sell it."

With all the mixed messages, consumers may have a hard time reading the housing market in 2005, said John Karevoll, an analyst with DataQuick Information Systems.

"I don't think I have seen as wide a range of forecasts," he said. "You can find a forecast that tells you what you want to hear."

San Diego Near Bottom of Housing Affordability

Builders call for reforms to reduce housing costs
01/06/2005
by Larry M Edwards

The San Diego region is the second-least affordable housing market not only in California but the nation, according to a report released today by the building industry.

What's more, California is home to the 11 least-affordable housing markets in the nation, as reported by the the National Association of Home Builders/Wells Fargo Housing Opportunity Index. The revised index reflects housing costs during the third quarter of 2004.

In San Diego, just 5.4 percent of median-priced homes are affordable to families with a median income of $63,400, the study found. The third-quarter median sales price used in computing the index for the metropolitan San Diego area was $470,000.

In response to the findings, the California Building Industry Association is urging Gov. Arnold Schwarzenegger and the state legislature to enact reforms that would increase the pace of housing production and meet the demand for new homes and apartments. But critics of the builder say industry practices exacerbate the affordability problem and that builders are unwilling to contribute their fair share of infrastructure costs needed to support additional development.

"It used to be that California dominated the 'bottom 10' list of least-affordable metropolitan areas. Now, we are the bottom 10 -- and then some," said Robert Rivinius, the CBIA's chief executive officer.

"What's worse is that even in California's most affordable market -- Tulare County -- less than half of the county's residents can afford a median-priced home," he added.

The least-affordable market out of 162 metropolitan areas nationwide is Santa Barbara County, where a family earning the median income could afford only 4.9 percent of area homes, according to the revised index. The next four least-affordable areas are San Diego County, Monterey County, Los Angeles County, and Orange County.

In his second state-of-the-state address yesterday, Gov. Schwarzenegger said he would "propose legislation that eliminates regulatory and legal hurdles that delay construction and increase the costs of new housing."

"We need roads and we need affordable housing," the governor said. "I want a California where people spend less time sitting on the freeway and more time in the homes that they own."

The reforms called for by the governor and CBIA include:

Ensuring an adequate supply of land for high-density condominiums as well as single-family homes, particularly in job centers.
Legislation that eliminates regulatory and legal hurdles.
Streamlining the permitting process for new housing.
"The governor clearly recognizes that California cannot sustain skyrocketing home prices and that housing production needs to keep up with demand," said Steve Doyle, CBIA president. "An average California subdivision takes a decade to be approved."
San Diego City Council member Donna Frye agrees that housing affordability is major concern, but says the builders are being less than candid.

"San Diego requires up to 20 percent of new homes to be affordable, but in most cases, builders pay the in-lieu fees rather than offer new units at the "affordable" price because they make more money," she said. "That contributes to the rising cost of housing."

Frye also points out that if housing construction outpaces infrastructure development, it creates a multitude of problems, not the least of which is traffic congestion. Mission Valley, for example has hundreds of new units coming on line, but there is no new fire station to meet public safety requirements.

Bordering on the ludicrous, in North County a feud erupted between the cities of Carlsbad and Oceanside after new homes were built in Carlsbad before additional roads to handle the increased traffic were completed. That pushed the additional traffic into nearby residential neighborhoods in Oceanside, so Oceanside erected barricades to block it. Which, in turn, cut off direct access to a neighborhood school. Congestion on major arterials in the east Carlsbad area increased until new roads opened late last year. Oceanside subsequently removed the barricades.

Housing cannot continue to be built in a vacuum, Frye said. It must be built in a coordinated manner that takes into account infrastructure needs that include roads, public transit, water, sewer, energy, open space, parks and public safety. And that requires comprehensive planning and development, which takes time.

As for developer impact fees, Frye said they are likely to go up within the city of San Diego. Carolyn Chase, a member of the San Diego Planning Commission and spokesperson for the Sierra Club, supports the fee increase.

"The building industry likes to believe it pays its fair share, but it doesn't," Chase said. Last year, she led an opposition effort against Proposition A -- the TransNet transportation initiative on the November ballot -- in part because commercial and industrial development is exempted from paying additional impact fees.

"It seems to me that if a new building has people working there, that will have an impact on roads and traffic," she said. "I don't see how they can argue it doesn't."

The initiative, which was narrowly approved by voters, imposes an impact fee of up to $2,000 on new housing units built in the county, however. The building industry opposed the fee but ultimately accepted it in exchange for the exemption on commercial and industrial development, according to an official with the San Diego Association of Governments, which placed the measure on the ballot.

With the median price of new housing in San Diego hovering near the half-million-dollar mark, $2,000 represents less than one-half of one percent of the selling price.