With the county's median home price experiencing its first year-to-year decline in a decade, would-be sellers are feeling a ...
By Lori Weisberg
and Emmet Pierce
UNION-TRIBUNE STAFF WRITERS

July 13, 2006

San Diego County's once blistering housing market moved into negative territory for the first time in 10 years as overall prices declined 1 percent last month from June 2005.

With home sales slowing for the 24th consecutive month, real estate analysts said the decline clearly indicates a softening market, but not one that is destined to crash.

“Across the region, prices are coming down, incentives are rampant, and sellers are adjusting to longer times on the market,” said Peter Dennehy of Sullivan Group Real Estate Advisors.

“People have come to regard their homes as a cash machine, and that's not how you should be looking at real estate,” he said.

DataQuick Information Systems reported yesterday that last month's median home price slid to $488,000, off 1 percent from a year earlier, and down 6 percent from last November's peak of $518,000.

Although resale prices for single-family homes showed a gain of nearly 2 percent from June 2005, the market's drop was brought by sagging prices for resale condos and new houses, DataQuick analyst John Karevoll said.

“To me, this is just part of a plateauing of prices,” he said. “Between now and the fall, I'd say half the months will be slightly positive and half slightly negative, but I really don't read the drama in these numbers that most people will.”

The numbers should come as little surprise to many home sellers who have watched their properties sit on the market for months, in some cases lowering their asking prices in hopes of getting an offer.

After having his vacant Escondido townhome languish for more than five months, Todd Fleischmann realized his price was too high for a market now driven by rising mortgage interest rates and slowing demand.

Late last month, after relocating to Portland, Ore., the 26-year-old computer network administrator and his wife, Elizabeth, changed real estate agents and dropped their asking price by nearly $24,000 to $338,000. Fleischmann had paid $324,000 for the property in mid-2004.

“It has been a disappointment but it is what it is,” Fleischmann said. “I am more concerned with selling my property than trying to get top dollar.”

Because the couple's finances have been stretched by the burden of paying rent in Portland, along with mortgage and homeowner fees on the Escondido property, they've decided to cut their losses.

“My wife and I are trying to get our lives started,” Fleischmann said. “It wasn't happening in San Diego. It is a pretty expensive area to live in.”

San Diego real estate agent Calvin Goad, who represents the Fleischmanns, says the region is experiencing a normal cycle of decline following a boom. “The prices are coming down right now, but it is a good time for the buyer to jump into the market,” he said. “San Diego historically does take a small drop in price, but then the market levels.”

Amid the overall price drop – the first since July 1996 – there were some positive signals in the market report for last month, including substantial price jumps for some communities from a year ago.

Single-family resale houses, more than half of the local housing market, showed a price gain of 1.8 percent over June of last year, DataQuick found. The median price last month in the category reached $565,000, a slight decline from May's record of $569,500. The median represents the midpoint of all sales, with half above and half below that figure.

Meanwhile, overall sales in June were up slightly from May, a hopeful sign of a strengthening market, some analysts said.

Nevertheless, sales were down 24 percent from a year earlier, the 24th consecutive month of year-to-year sales declines.

“We are seeing an increase of inventories to normal levels, but it has dramatically changed the psychology of the market,” said Leslie Appleton-Young, chief economist for the California Association of Realtors. “Buyers have more properties to look at, more time to decide.

“There is excess steam in the market created by three to four years of very rapid price appreciation,” she said.

Still, long gone are the heady days of double-digit price gains. The last time San Diego County saw year-over-year increases in the double digits was April of last year, topping off a trend that had held steady for 64 consecutive months, Karevoll said.

Home prices for the first half of this year rose a mere 2.7 percent, compared with 11 percent during the same period last year, a clear indicator of a deflating market.

No one knows that better than Pat and Sandra Daugherty, who have been trying to sell their Fletcher Hills home since February with no luck, despite lowering the price by more than $50,000.

Currently out of work and eager to move to Colorado or Texas for a new job, Pat Daugherty fears he and his wife might lose money on the 2,000-square-foot home they bought two years ago for $540,000. They've put roughly $75,000 in improvements into the house and have an asking price ranging from $635,000 to $675,000.

“At this point, we're willing to take a loss,” said Daugherty, who has two sons, ages 20 and 22, who will be moving with their parents. “We really need to get this off our back so we can get on with it. I'm obviously frustrated because we worked so long and hard on this, but sooner or later the prices had to back down.”

Dyann Reilly, a retired schoolteacher, has been struggling to sell her two-story, 2,010-square-foot downtown condo for a year while she lives in a one-story downtown unit that is more comfortable for her. She originally listed the condo she bought four years ago for $630,000 at $1.2 million but has since lowered the asking price to $900,000.

“I think people who come downtown want a view, and I don't have one,” said Reilly, 65. “I also think there are too many condos available.”

Countywide, the number of homes for sale has been rising steadily, with active listings hovering at 19,803 last month, according to the San Diego Association of Realtors. That compares with about 10,900 a year ago and 6,600 in 2004.

San Diego home builders are also feeling the effects of a sluggish market and are responding by dropping prices and offering generous incentives, noted Dennehy of the Sullivan Group.

The segment of the housing market showing the biggest drop last month was new home sales, which saw prices decline 8 percent. That was influenced, in part, by a weakening demand for condo conversions.

“Sales have slowed, concessions have increased, and prices have dropped fairly significantly,” said Paul Kerr, president of Davlyn Investments, a local condo converter. “Buyers are sitting on the sidelines waiting for a theoretical price reduction of 30 percent, and I don't necessarily believe that's going to happen.”

Steve Doyle, Brookfield Homes' president for the San Diego region, said his company has been helping buyers with financing costs and offering upgrades.

Recent Brookfield incentives have ranged from about $3,000 for a $400,000 attached home to as much a $20,000 for homes that cost in excess of $1 million, he said.

Shares of publicly held Brookfield dipped recently when the company cut its full-year forecast for home sales, citing slowing markets in the San Diego and Riverside areas and Washington, D.C.

“Long-term, the housing market remains very strong,” Doyle emphasized. “When you look at economics, we still have positive job growth.”

While many neighborhoods throughout San Diego County continue to experience sizable upswings in home values, there were nearly three dozen ZIP codes where median prices fell in June, according to DataQuick. And of the more than 90 ZIP codes in the county, all but 10 had median prices last month that were lower than their peaks set in previous months, Karevoll said.

Some homeowners still have the luxury of waiting out the stalled market until price appreciation resumes.

Gayle Johnson, 59, a registered nurse, recently pulled her two-bedroom rental condo in Rancho Peñasquitos off the market. She bought it for $255,000 in July 2003. Her asking price, a range of $320,000 to $340,000, drew no offers. Johnson holds that the recent conversion of numerous apartments to condominiums has weakened prices for attached homes. She plans to rent out her unit until the market improves.

“Everything goes around and comes around again,” Johnson said, “so I am not too concerned.

Is an open house a waste of time?

Agents admit that few sales traditionally come from open houses. And now the Internet is making them even less valuable.
By Melinda Fulmer

Los Angeles real estate agent Liz Johnson loves open houses, but not because they move her properties. The real reason Johnson holds them is because they bring her more business.

Prospective home buyers walk through and ask what other listings she has. "They've always been better for agents than sellers," she says.

The proliferation of Internet listings and other online real estate information is quickly making open houses more of an option, rather than a requirement for selling a home. In 1995, just 2% of home buyers used the Internet to look for a home, according to the National Association of Realtors. Last year, 77% of home buyers shopped online.

Indeed, only 2% to 4% of Johnson's listings sell from open houses. "It's not a necessity," she says.

Agents, sellers question effectiveness
For the most part, Johnson, an agent with Dilbeck Realtors and a 25-year veteran of the real estate business, doesn't hold open houses for her listings unless sellers press the issue. Most of her sales come from her contacts with other agents and from the multiple listing service, she says.

Many agents now refuse to hold open houses, considering them a waste of time, and a security threat. And many sellers now prefer to open their doors to serious buyers only.

"They're not effective," says Daniel Fellars, a 29-year-old software engineer from the San Diego suburb of San Marcos, Calif., who recently put his four-bedroom, two-and-a-half-bath home on the market. A series of open houses did little to move Fellars' former house, which sold about a year ago. "We had an open house five weeks in a row and never got a single person to come to our house," he says.

This time around, Fellars has decided to forego scheduled open houses and simply give potential buyers private tours of his house as needed. He has posted 30 pictures on his home blog, linking it to Google, Craigslist and other popular Web sites. In the next week, he will add a video tour, showing every nook and cranny of the house, much as an agent would.

So far, the blog has brought in about 20 interested buyers, but he has received no offers. Fellars says he knows he faces an uphill battle, given the slowing housing market and the other four houses for sale on his street. But a few of Fellars' neighbors recently had open houses and he says, "I haven't seen any cars in their driveways."

Open and shut
Consumer sentiment about open houses has waxed and waned over the years, along with the ups and downs of the real estate market. In 1995, 41% of buyers surveyed relied on open houses to sell their home, according to data from the NAR. By 2000, it had dropped to 28%. Beginning in 2003, however, as the market started to heat up again, that number began rising. By 2005, the last year for which data is available, 51% of all sellers were using open houses, though not all agreed they were effective. Some 45% of sellers found open houses only "somewhat useful" and another 12% didn't consider them useful at all, according to the NAR.

"Many sellers are just a little bit leery of having an open house," says Pat Vredevoogd, agent and broker-owner of AJS Realty in Grand Rapids, Mich., and incoming NAR president.

Some, she says, are worried about letting complete strangers roam freely through their house, with access to electronics, jewelry, prescription drugs and personal information.

Others just don't want their neighbors and a host of other so-called "looky-loos" wasting their time just for a look at their décor.

And many agents won't do them for security reasons, as a number of their fellow Realtors have been attacked and some even killed, as they sat in an empty house alone and vulnerable.

Vredevoogd, herself, isn't keen on them. While they have proved helpful over the years on some of her more expensive listings, most didn't produce a sale. "Over the past year, maybe two or three of the 50 houses I sold were from an open house," she says. "Personally, I think it's a waste of time. It's one of those things that has gone by the wayside."

Before jumping into an open house, Vredevoogd counsels her clients to put the house up on the local MLS and other Web sites, with a lot of pictures and perhaps a virtual tour if the home has a lot of nice features. She sends out a barrage of e-mails to other agents and makes some calls. If the house isn't getting a lot of interest, only then will she go through with an open house.

Online house hunting
"There's no doubt about it, the Web is changing real estate," says Colby Sambrotto, chief operating officer of ForSaleByOwner.com. While his site, which lists about 100,000 homes a year, gives people the tools to hold and advertise an open house, he thinks more of the browsing is now done online.

Home buyers, he says, don't want to spend a day in the car with a Realtor like they did in years past. Many people want to spend an hour or less, and zip out on their lunch break to see a house.

While this may inconvenience sellers, who have to show their house more often, Sambrotto says it's worthwhile because these parties are more serious. "They're not looky-loos," he says. "They've done their research."

When open houses still make sense
There are times, says broker Greg Meer, Sr. of Keller Williams Realty in Las Vegas, when an open house is not practical at all, such as if a house is off the beaten path, or in a gated community. Likewise, it might be best to avoid an open house on a shabby listing or one that requires a lot of work. It probably won't get much traffic, he says, and agents will be reluctant to have their name advertised heavily in association with it.

But an open house can be a valuable opportunity to get feedback about what is and isn’t attractive about a house, Meer says. He cautions buyers against holding them too often, however. "It can send a signal that (a house) is a little bit market worn and a tough property to move."

In Meer's opinion, an open house is only worth having if it's done properly. That involves sprucing up the house and its landscaping and advertising it well in advance. "Over the past couple of years, people got spoiled by being able to throw up a sign and get lots of traffic," he says.

Desperate measures
Nationwide, home sales are expected to drop 6% this year, and sellers in many markets are already dropping their prices. That may prompt more agents to turn to open houses as a last-ditch effort, Vredevoogd says, after years of avoiding them. "In a buyer's market, if you are a seller you want to try everything."

In many markets, that includes hiring a professional stager to make your home look brand new, or at the very least, tastefully appointed. Gail Mayhugh, a professional home stager and owner of GMJ Interiors in Las Vegas, said she has seen an uptick in her business as the once-hot housing market has cooled.

"All of a sudden the agents are calling me for open houses," she says, and many are willing to spend part of their commission to make their property stand out. "There were 19 of the same floor plans for sale in one neighborhood," she recalls.

And while open houses may be declining in many parts of the country, some neighborhoods are finding them effective ways to raise the profile of an entire community, if they are all done at the same time. Recently, four neighborhoods in the Grandmont Rosedale area of Detroit teamed up for a joint open house with 35 of the area's homes open for viewing on a single day. And developers in Long Beach, Calif., showed 2,300 housing units in that city's downtown on May 20, in an attempt to stimulate sales.

See-it-to-believe-it homes
To be sure, in some cases, a house is just too unique to market without an open house. Art professor Mercedes Teixido and her husband have had three open houses in the six weeks their two-bedroom Pasadena, Calif.-home has been on the market -- the most recent was held after they had already accepted an offer.

Their house, they say, is the kind you have to see to believe. "It has a unique sensibility," Teixido says, with spacious rooms and a large amount of built-in furniture that was done by hand, including the master bed and nightstands.

The photos on the MLS didn't do these features justice. And getting people in from her surrounding neighborhood did help. She has now accepted an offer and has a back-up offer just in case.

"Part of the reason for having an open house," she says, "is you do just want to find someone who falls in love with it."

Waiting Out a Housing Slowdown

By RICH TOSCANO
Thursday, April 20, 2006

As previously threatened, we continue our series on commonly-held housing market misconceptions. This week we will look at another rationale that is often used to justify San Diego's immunity to declining home prices.

The claim goes something like this: "If homeowners can't get the prices they want, they will just take their homes off the market until such time as they can get the prices they want." Thus, we are led to believe, will the citizens of San Diego sit out any ephemeral bout of housing market weakness, and thus will prices remain steady.

Should home pricing power start to go south, I agree entirely that potential homesellers will want to wait it out. The question is how many of them will have that luxury.

Of primary concern is the de-facto speculation discussed in last week's column. To briefly review, about 80 percent of San Diego homeowners who bought in the past two years used adjustable-rate mortgages (ARMs). The rise in ARM rates that began in mid-2005 all but guarantees that homeowners who have adjustable mortgages resetting any time soon will face significantly higher monthly payments.

But rising interest rates aren't the only issue. Almost 50 percent of buyers during the past couple of years used interest-only mortgages, holders of which are exposed to the above interest rate risks but can additionally expect to have their payments increase when the time comes to start paying down loan principals.

Related Links

ARM Rates

Homeowner Downpayments

And while I don't have a specific headcount, I am assured by mortgage brokers that negative amortization loans were quite the rage in 2005. Borrowers using these loans pay no principal and only some of the interest, guaranteeing a significant eventual payment increase on top of whatever could be expected from rising rates. Federal banking regulation bigwig John Dugan, head of the Office of the Comptroller of the Currency, has said that it is not unreasonable to expect that some neg-am borrowers will see their monthly payments double in the not-so-distant future.

Meanwhile, as of last year, fewer than one-third of homebuyers made any down payment at all. And many earlier buyers who had built up some home equity due to general market appreciation have since withdrawn that equity through home equity lines of credit and cash-out refinancings -- usually at an adjustable rate, of course.

In short, we have a substantial number of housing-market participants who may soon find themselves facing what is referred to in the business as "payment shock" -- and they might not have much in the way of home equity nest-eggs to help them take the hit.

The problems aren't only found on the expense side of the ledger. In a prior column, I discussed San Diego's economic dependence on housing, noting that a hefty portion of employment growth over the past few years has related in one way or another to the real estate industry.

A continuing erosion of housing demand will translate directly into less income for real estate agents, mortgage brokers, and other housing intermediaries. Low demand will also lead to a slowdown in construction and the employment it provides. A lack of price appreciation will curtail the home-equity cashouts that have proven such a boon to San Diego retail businesses.

Whether or not homesellers try to wait out a period of housing weakness has no effect on these realities.

In the months and years ahead, people whose income depends on a robust housing market, whether directly or indirectly, may find themselves making less money than they expected.

Whether due to rising mortgage bills, falling incomes, or a combination of both, a large number of San Diegans simply may not be able to continue making those monthly house payments. It is unfortunate, but it is nonetheless a very real possibility.

People in this situation will not be able to sit tight and wait for the good times to start rolling again. They will have to sell. And it is when people have to sell that prices start dropping.

California home sales fell in February

By Alex Veiga
ASSOCIATED PRESS

3:11 a.m. March 17, 2006

LOS ANGELES – Home sales declined statewide in February and the rate of price increases slowed, a reflection of growing pressure on sellers to dial back prices to lure increasingly tentative buyers.

In all, 37,900 new and resale houses and condominiums were sold last month, a 9.3 percent decline from 41,800 in February 2005 and a drop of 1 percent from January's sales, real estate research firm DataQuick Information Systems reported Thursday.

The state has seen annual home sales decline for five straight months. Last month's sales were the lowest since 32,454 homes were sold in February 2001, the report said.

February is traditionally a slow month, and comparisons to last year could be misleading because it was such a strong year.

“It appears that today's market is probably as close to what we would call normal as we've had in a long time,” said John Karevoll, a DataQuick analyst.

Still, the slowdown in sales also reflects the tussle between buyers and sellers as the housing market continues to level off from a five-year climb.

“What I'm seeing is both buyers and sellers digging their heels in, buyers saying 'I'm not ready to buy' and sellers going 'I'm not going to lower the price,'” said David Kerr, a Realtor with Emeryville-based ZipRealty Inc.

“A lot of sellers are still pricing to the higher-end and their properties are still sitting there, and they're not considering realistic offers,” said Kerr, whose territory includes Oakland and Berkeley.

The median home price in California last month hit $457,000, up 1.1 percent from January and up 12.3 percent from $407,000 in the same period a year ago. It marks the lowest annual increase since 10.7 percent in December 2001, DataQuick said.

Statewide home price increases peaked in June 2004 at 23.2 percent and that rate has gradually declined ever since.

DataQuick released figures Thursday for the nine-county region surrounding San Francisco Bay. Sales in the area were down 16.8 percent in February compared to the same month last year but up 3.4 percent from January, according to DataQuick.

The median price of a home in the region in February was $616,000, up 12.2 percent from $549,000 a year ago and up 1.5 percent compared to January.

In a six-county area of Southern California, the number of homes sold last month also fell, DataQuick said earlier this week.

In all, 19,905 homes were sold during the month, a 7 percent drop from the same period a year ago and down nearly 1 percent from January.

The median home price in the region hit $480,000 last month, up 12.9 percent from February 2005 and up 2.3 percent from January, DataQuick said.

One factor behind the apparent disconnect between buyers and sellers involves the standard practice of using sales of comparable homes to set an asking price.

Such comparisons are typically made with homes sold within a six-month period. But in many cases, the prices that homes fetched a half-year ago don't square with many buyers' perceptions of where the market is headed.

“Sellers do not recognize what's going on in terms of the market transitioning,” Kerr said. “They still think that because the house across the street sold for like $50,000 to $100,000 more than theirs, that theirs should be worth that, plus some. And what's happening is, it's not happening.”

Dale Hansen, a computer technician in Fairfield, listed his four-bedroom, two and a half-bath home for $665,000 in early January but took it off the market last month after only receiving offers well-below his asking price.

As a result, Hansen and his wife fell out of escrow on a condominium they were looking to buy after selling their home.

“We had a lot of traffic, a lot of interest,” said Hansen, 31. “A lot of people are coming in $20,000 to $25,000 right off less than what we're asking for.”

The couple asked their real estate agent to hold firm on the price. They plan to relist the home next month.

“We went into this whole thing knowing it's not the best time of year to sell, but we wanted to go ahead and give it a shot,” Hansen said. “We'll cross our fingers and hope it goes well.”

Despite the market's cooldown in recent months, some buyers say it's still tough to find the right property in their price range.

Mathew Moses, an environmental engineer from Berkeley, has been searching for a home in the $500,000 to $600,000 range since December but hasn't found anything to compel him to make an offer.

“The stuff that I'm looking at is way overpriced,” said Moses, 31.

Still, Moses says as long as interest rates don't rise too high, he can wait for the right deal.

“I think it could be helpful if I don't find anything ideal for me and wait another six months,” he said. “I'm willing to do that.”

You Sell, Me Sell, We Sell

By WILL CARLESS
Voice Staff Writer
Friday, Feb. 10, 2006

For the last few years, there were maybe a couple of homes for sale at any one time in the Morningside development in Sabre Springs, a local realtor said.

Right now, there are 10.

The huddle of houses for sale in the San Diego neighborhood is part of a growing phenomenon in San Diego County real estate. "Cluster selling," which Realtors said they haven't seen since the mid-1990s, is now becoming evident in several San Diego neighborhoods.

"People are getting nervous. They're seeing their neighbors selling their home and they're thinking maybe now I should go ahead and put mine on the market before they take something really low and the prices go down," said Karen Whitfield, a Realtor with Re/Max Hometown Realtors in Santee.

The prevalence of such cluster selling is undoubtedly adding to the high levels of real estate inventory in the San Diego County market. There were 16,464 homes on the market Wednesday, according to www.ziprealty.com, a Web site that keeps inventory and sales statistics. That's up from March 2004's all-time record low inventory of 2,301 homes.

Alan Gin, professor of economics at the University of San Diego's Burnham-Moores Center for Real Estate, said he doesn't read too much into the trend towards cluster selling.

Gin said homes sales generally lead to more home sales, whether the sales prices are high or low. When a home sells for more than expected, Gin said, the neighbors may try to cash in their equity. When a home sells for a disappointing price, however, the neighbors may think it's time to bail.

Gin said it's too early to tell whether the selling trends being seen in the county could lead to a larger "chain reaction" in selling, as homeowners scramble to cash in on the equity gains they have seen in the past few years.

"I'd like to see more data," he said.

But Realtors said they are certainly starting to see homeowners who want to cash in on their homes in the face of an uncertain future for home values. Indeed, some Realtors said they are advising their clients that selling now, rather than in a few months, is a good idea, if only because it could take a few months to sell their home.

"You might as well get into the market right now. I don't care if you've got to move out and move into an apartment for a couple of months. You'd be a lot cheaper doing that now, and probably get a better price now," said Gordon Kane, a realtor with Help-U-Sell Realty in Poway.

Many investors and first time buyers have ridden the wave of price increases this far, Realtors said, and are now ready to paddle to shore before they get wiped out.

"We see a lot of move-out buyers," said Judy Kesselring, a Realtor with Keller Williams Realty in Escondido. "You have a young couple in a condo who decide to have a family and buy a home. They don't want to pay $600,000 for a small home, so they say 'I'm going to take my equity and go to Arizona or Nevada.' "

But Russ Valone, president and CEO of MarketPointe Realty Advisors in San Diego, said moving away from California because you've made some money on your house is generally a bad idea. He said he always has the same advice for people looking to move elsewhere.

"Go where you're going to go, keep your house here, move there, spend 12 to 24 months there and make sure that's where you want to be. Because once you exit, the price of re-entry -- even if the market remains relatively flat -- means it's still very difficult to do," Valone said.

If the trend towards cluster selling means speculators -- people who purchase homes solely as investments -- are getting out of the real estate market, then Valone said that's good for everyone in the long-term. He doesn't buy the argument that such trends will lead to a chain reaction or panic selling, and said that instead they signal a return to a normal market. That's a market with modest year-on-year property value gains and where the people who buy houses actually plan to live in them.

Rich Toscano, a Voice of San Diego columnist and an independent real estate analyst, said he's fascinated by the rise in cluster selling.

"While the countywide median home price is up over last year, more than 20 percent of San Diego ZIP codes have seen year-over-year median price declines of 5 percent or more. 'Cluster selling' could potentially explain the regional disparity in home price performance," Toscano said.

With home prices so reliant on the optimistic or pessimistic sentiment flowing through the proverbial grapevine, Toscano said the latest trends could be indicative of a changing attitude about San Diego's housing market.

"It makes sense that the euphoria would start fading in a piecemeal manner, and through neighbors starting to discuss the idea that maybe home prices can go down."

Risky Business

By WILL CARLESS
Voice Staff Writer
Monday, Dec. 19, 2005

There's a mortgage deal out there for everyone. San Diego lenders say that, these days, they can find anyone a loan who wants one.

But the easy availability of financing, and the implications of providing high-risk loans to high-risk borrowers, has real-estate experts and analysts worried. They are concerned that many ambitious homeowners have over-extended themselves -- something that may leave them vulnerable in the event of unforeseen circumstances.

And if these homeowners are vulnerable, so is the housing market in San Diego. Analysts say that if too many borrowers default, the market could become flooded with homes for sale, thus pushing prices down.

Raphael Bostic, director of the Master in Real Estate Development Program at USC's School of Policy, Planning and Development, said this is possibly the most critical issue facing San Diego's real estate market today.

"You're looking at the prospect of many, many homes going into default and disclosure, which then disrupts basically the whole housing market," Bostic said.

John Marcell, president of the Mortgage Brokers Association of California, said interest-only loans and other higher-risk loans have only become a mainstream borrowing option in the last few years. Marcell said this increase is due largely to California's skyrocketing home prices.

When a borrower takes out an interest-only mortgage, they agree to only pay the interest on the money they have borrowed. Therefore, as they make monthly payments, their outstanding balance remains the same. These mortgages are usually interest-only for a specified period of time, often 10 years.

Bostic and others argue that these loans are inherently more problematic than traditional fixed-rate mortgages because borrowers do not build equity in their homes unless property values rise. In the event that home prices fall, borrowers can easily find themselves paying interest on a loan that is not netting them any value.

Three or four years ago, Marcell said, many of today's borrowing options simply did not exist. As prices have risen, he said, traditional mortgage plans have proved unwieldy for many would-be home owners and lenders have become more and more ingenious when it comes to offering mortgages.

"Everybody's needing to do new loans and find new ways to make money," said Rishon Wagner, vice president of The Mortgage Company in Poway.

Bostic called the new breed of mortgages "risky." That risk is double-edged, he said. Not only do these loans place a higher burden on borrowers, he said, but they are also easier to qualify for than traditional 30-year fixed-rate mortgages.

Because of the hazards of these new loans, Bostic said, borrowers are increasingly placing themselves at the mercy of factors beyond their control. Should the new breed of borrowers run into trouble, he said, they could easily find themselves defaulting on their loans.

"If these households were to face stresses in their lives, if they had a health accident or if the roof blew off their house, or if their car needed major repairs or if, God forbid, they were laid off, with these high-burden mortgages, these households are not going to have any kind of buffer to weather those sorts of storms," Bostic said.

There are two major risks with an interest-only loan. One of them approaches when the interest-only period ends and in order to begin paying the loan off, monthly payments immediately ramp up to potentially unsustainable levels. The second worry comes with the fact that because borrowers are not paying off any part of their loans, they may end up with little or no equity in their home.

The only equity comes from the rising value of the house they purchase. But if the home's value sinks or stays level, the borrower will not build equity and could potentially end up owing more on their mortgage than the house is worth.

Traditional mortgages force buyers to pay off their loans little by little thereby helping create equity in addition to that which the value of the house creates.

Without a buffer like that, Bostic said, these borrowers will have no choice but to foreclose if they can't pay off their loan by selling the house. An increase in foreclosures traditionally results in lower property values as the market responds to the increased supply of property.

Alan Gin, a professor of economics at the University of San Diego's Burnham-Moores Center for Real Estate, said another factor that could land these borrowers in trouble is interest rates. If interest rates rise, payments on a non-fixed-rate mortgage go up, and borrowers are more likely to foreclose.

Though Gin doesn't foresee a severe spike in interest rates -- his prediction is for short-term rates to rise 1 percent in the next year -- he said even a modest rise in rates could have a marked effect on debtors. Add to the equation a possible decrease in home values, he added, and the market could be in serious trouble.

Not everyone agrees with the skeptical view of non-traditional mortgages, however.

Mike Zarro, office manager at Coast Mortgage Company in La Jolla, doesn't like to call interest-only mortgages "risky." He said the loans that have become popular in the last few years are simply the next evolutionary step in home purchase financing.

Thirty years ago, Zarro said, a borrower only really had one choice for a loan: a 30-year fixed-rate mortgage. When interest rates rose drastically in the early 1980s, Zarro said, the private and public sectors came out with the adjustable-rate mortgage as a solution.

"In those days, that was considered risky," said Zarro. "Today, it's an absolute standard. So the interest-only, that some people are calling risky today, 20 years from now, might be an absolute standard as well."

San Diego's price woes may presage U.S. dip

Sunday, December 04, 2005
BY ALEX VEIGA
Associated Press

When Jason and Laura Bennett bought their San Diego home two years ago, the housing market was among the hottest in the nation. Would-be buyers made offers as soon as "For Sale" signs went up, then bid even higher in the frenzy to close the deal.

Now sellers, the Bennetts have to chase buyers.

Less than two months after the couple listed their two-bedroom, two-bath condo, they've had to slash the high end of their asking price by $10,000 to keep up with other sellers in the same complex who have dialed back prices in hopes of hooking a buyer.

"It'll be good for us when we are on the buying end, because there are a lot of motivated sellers," said Laura Bennett, 33, a kindergarten teacher. "But on the selling end, it's a little bit harder for us because there's so much available right now and it's moving so slow."

The national housing market has begun showing signs of a slowdown, with the rate of home-price increases easing this year in some areas where double-digit percentage hikes became almost routine in recent years.

Experts say the trend should continue next year, particularly if mortgage rates continue to trend upward, squeezing some buyers' ability to afford home loans.

"You can't sustain 20 percent- plus price growth," said Walter Molony of the National Association of Realtors, which forecasts sales next year to cool 3.5 percent. "You're definitely going to come up to a brick wall of affordability where first-time buyers can't afford to get into the market."

In San Diego, one of the first housing markets in the nation to take off in the late 1990s, home appreciation began a steady cooldown this year, tipping the scales in favor of homebuyers again -- a fate that would-be buyers elsewhere could soon share as prices in other markets cool.

The annual rate of home appreciation in San Diego County hit double digits in 1998 and peaked at 27.4 percent in November 2002. It bottomed out in August at 2.1 percent.

Declines into the single digits have also occurred in areas such as Boston, which also experienced brisk home price gains during the real estate boom.

"We really believe it's a return to normalcy," said Patrick Lashinsky, senior vice president of product strategy for ZipRealty. "It could swing all the way past normal into being a buyers market; we won't know that for a while."

In San Diego, homes are now on the market an average of 43 days -- almost twice as long as a year ago.

"We can't seem to get anybody to make an offer," said Robert Vaughan, whose four-bedroom, three-and-a-half-bath home in the San Diego suburb of El Cajon has been for sale since August. "The market has obviously changed."

For the Bennetts, a buyers market means they might actually be able to trade up to a single-family home. But they can't afford to buy anything until they sell the condo they bought in 2003 for $293,000.

The Bennetts initially listed their condo at $395,000 to $429,000. They're even willing to pay closing costs to entice a buyer. But they fear slashing their asking price too far will hurt their ability to buy their next home.

"We need every single penny of our equity to be able to put a (down payment) on the next house," Bennett said. "It's kind of a Catch-22."

Futures trading will roll dice on San Diego's housing boom

Investment is a hedge on 10 cities' markets
By Mike Freeman
UNION-TRIBUNE STAFF WRITER

November 10, 2005

Starting next year, investors will be able to bet on whether housing prices in San Diego and nine other cities will continue to rise or plunge off a cliff.

The Chicago Mercantile Exchange, a leading futures market, plans to begin home-price trading in April. Investors will be able to buy contracts on the future direction of housing prices in the 10 cities, similar to what investors do now with oil or corn.

The investment vehicles are designed as a hedge against the risk in cities where home prices tend to be volatile. They will be based on median price indexes designed to represent movements in home-price values for each city.

While some economists question whether a home-price derivative market will gain traction, the fact that the Chicago Mercantile Exchange would launch such products could signal a growing concern about the nation's housing boom.

San Diego ranked second nationally among cities most likely to see housing price declines in the next two years, according to a survey from PMI, a mortgage insurance provider based in the Bay Area.

But the company only puts the odds of price declines in San Diego at roughly 50-50. And it doesn't specify whether prices will dive or dip slightly.

Hence, the potential demand for a home-price derivative market.

The derivatives aren't being tailored to individual homeowners. Instead, they target home builders, banks and large mortgage institutions that own bundles of home loans.

"It's a good idea – not for you and me – but it will be a risk-sharing tool for home builders and potentially some large real estate investors," said Stefan Meierhofer, a partner in A&M Investment Management in San Diego.

Still, homeowners could tap into the high-risk investment vehicles if they chose to.

The concept of real estate derivatives has been discussed since the early 1990s, but it took a boom in housing prices to propel it to reality. This will be the first time such a market is available.

Home values appreciated 65 percent nationwide from 2000 to 2004 and more than doubled in some areas, according to the National Association of Realtors. In San Diego, they've increased more than 140 percent in the past decade. U.S. residential real estate was valued at $18.6 trillion at the end of last year.

"There really is no way (now) for anyone to hedge home prices," said CEO Sam Masucci of Macro Securities Research, a Morristown, N.J.-based financial research firm that's developing the contracts with the Chicago Mercantile Exchange. "Or for institutional investors to gain exposure to the market without going out and buying homes.

"Housing is one of the largest asset classes in the world, (and) we thought it made a lot of sense to give people access to it," he said. "One never knows when you launch something like this, whether it's going to be successful or bomb. But all the elements are there for it to be successful."

Housing derivatives would work in a similar way to futures contracts. Say an investor thought prices would rise in San Diego. He or she would buy a futures contract based on the median price index for the city. If prices rise within the contract time frame, the value of the contract increases.

But say an investor believed prices would fall. He or she would buy versions of contracts called put options. These options typically cost several thousand dollars. They allow holders to sell their contracts at a gain if the price drops, ensuring that they recoup some of their lost house profits in a declining market.

The housing derivatives market would differ from traditional commodity futures, where a product, say oil or corn, is eventually delivered. With this market, investors would be betting on the direction of the median price index without ever taking possession of a house. The contracts instead would be settled in cash based on the value of the index.

"If you owned an expensive home and thought values were going to drop 40 percent – you'd say 40 percent of $800,000 is quite a bit," said James Barth, an economist and senior fellow at the Milken Institute in Santa Monica. "So you'd buy a put option where basically when the house went down in value, the put option would go up in value and you wouldn't lose much of anything."

Besides San Diego, other cities in the derivatives market are Los Angeles, San Francisco, Las Vegas, Boston, Chicago, Denver, Miami, New York and Washington. Investors also can buy based on a composite index of the 10 cities.

The real estate research firm Fiserv Case Shiller Weiss Inc. is involved in the project, developing the median price indexes for the 10 cities. Robert Shiller and Karl Case are leading real estate economists, Barth said.

"That tells you this isn't to be taken as a trivial exercise," he said. "These are very solid people with stellar reputations."

Still, many new financial instruments fail, Barth noted. If too many investors bet housing prices will fall, for example, the market becomes lopsided and tends to collapse.

Although some housing markets are volatile, particularly on the East Coast and West Coast, housing overall has been a good long-term investment, Barth said. So homeowners and investors may shun a hedging strategy.

"They may say, 'Yeah, values are going to go down, but if I'm going to stay in the home, I don't need to worry about that downside risk because in three or four or five years, they'll be back up again. So why hedge?' " Barth said.

Moreover, the median price index may not be accurate enough to help many homeowners reduce their risk. If prices for $1 million homes were falling, yet prices for more affordable homes were rising, the median would tend to reflect rising prices. So investing in median-based derivatives would provide no benefit to luxury homeowners.

"My initial gut reaction is the median would not be a very good read on the market," said Elaine Worzala, a professor of real estate at the University of San Diego. "I don't think it's for individuals. The people who could use it are lenders who have a portfolio in real estate where they're trying to minimize risk."

She continued, "For investors, returns might be less, but you're not subject to that big negative, which is what you really want to avoid."

30-year mortgages still over 6%

UNION-TRIBUNE

October 28, 2005

Rates on 30-year mortgages stayed above 6 percent for the third straight week, rising to the highest level in 15 months.

Freddie Mac reported 30-year, fixed-rate mortgages rose to 6.15 percent from 6.10 percent last week and the highest level since 6.21 percent in late July 2004.

Rates on 15-year, fixed-rate mortgages averaged 5.69 percent, up from 5.65 percent. One-year adjustable rate mortgages rose to 4.91 percent from 4.89 percent. Rates on five-year hybrid adjustable rate mortgages rose to 5.63 percent from 5.59 percent.

The nationwide averages for mortgage rates do not include add-on fees known as points. The 30-year and 15-year mortgages both carried a nationwide average fee of 0.5 point while the five-year ARM had an average fee of 0.6 point and the one-year ARM had an average fee of 0.7 point.

Associated Press

DJ Orthopedics earnings up

DJ Orthopedics, a Vista-based company that makes rehabilitation products for the non-operative orthopedic market, reported third-quarter earnings of $7.5 million, or 33 cents a share, increase over the $4.7 million, or 20 cents a share, a year earlier.

Earnings included a $400,000 charge to write off previously deferred expenses related to possible acquisitions that the company stopped pursing. Revenue rose to $72.1 million from $62.5 million.

Iomega narrows quarterly loss

Iomega, a San Diego maker of personal data storage products, lost $12.3 million in its third quarter, compared with a loss of $15.8 million for the same quarter last year. On a per share basis, the company lost 24 cents, down from a 31 cent loss the prior year.

The company sales fell to $55.8 million from $77.2 million. Iomega continues to suffer from declines in its core Zip drive products, which posted sales of $14.9 million, down $17 million for the same period last year. Iomega has introduced a host of other data storage products that have been slow to take hold.

Pan Pacific's net income drops

Pan Pacific Retail Properties, an owner of grocery-anchored shopping centers, reported net income of $24.8 million, or 61 cents a share, for its third quarter. The Vista-based real estate investment trust's income was down from $31 million a year earlier.

Funds from operations, a key gauge of a REIT's performance, increased 7.9 percent to $39.5 million, or 96 cents a share, from the prior year.

Revenue was nearly $61 million, compared with $56.1 million the prior year.

Overland Storage records loss

Overland Storage reported a first-quarter net loss of $2.9 million, or 21 cents a share, vs. net income of $1.9 million, or 13 cents a share, for the same quarter last year.

The San Diego maker of tape libraries and other data storage products posted sales for the quarter of $58.5 million, compared with $59.5 million for the same period last year.

The company attributed the loss to costs associated with outsourcing its manufacturing to a third party and the company's $9 million acquisition of Zetta Systems, a storage software company.

Nuvasive shows loss in quarter

Nuvasive, a San Diego-based company developing products for minimally invasive spine surgery, reported a loss of $18.5 million, or 74 cents a share for the quarter ended Sept. 30. The company, which had its initial public offering in May 2004, reported third quarter revenue of $15.1 million, a 48.6 percent increase over the $10.2 million for the third quarter of 2004. The company reported cash and cash equivalents of $25 million on Sept. 30.

Verizon says earnings climb

Verizon Communications Inc.'s earnings edged higher in the third quarter as record growth in wireless and broadband subscribers offset the ongoing declines in traditional phone lines at the big telecommunications company that is buying MCI Inc. Verizon said it earned $1.87 billion, or 67 cents per share, in the July-September period, up from $1.80 billion, or 64 cents a share, a year ago.

The latest results included a net gain of $37 million from the sale of a New York City office building as well as tax benefits of $115 million that included a repatriation of foreign earnings. Those gains were roughly offset by a $125 million expense relating to Verizon's investment in aircraft leases impacted by recent airline bankruptcies.

Red-hot housing may cool economy

Article published Sep 28, 2005

Mediocrity is the best Californians can hope for on the economic horizon, according to today's third-quarter report from the UCLA Anderson Forecast.

The worst scenario -- a real estate-led recession -- could bring about weak growth for the next two years. And it all revolves around the red-hot housing market and its cousins -- construction and finance -- the dominant force in the state's economy for many years running, Anderson Forecast senior economist Christopher Thornberg said.

The recovery mode the state finds itself in has not been seen before, according to Thornberg, author of the Anderson Forecast's California Report.

"It's being driven by consumer spending that is itself being driven ever higher by the fabulous sense of wealth homeowners are feeling," according to the report.

"In the meantime, sectors core to California's long-run economic health -- information, manufacturing, professional services -- continue to languish," Thornberg wrote.

Jobs, especially in manufacturing, are at risk, and growth in what Thornberg called "real workplace earnings" is expected to slow down more that it has already.

In a telephone interview from his Los Angeles office, Thornberg said that when homeowners realize their sense of wealth -- "completely unjustified based on fundamentals" -- diminishes, it will come fast, and that will cause problems.

"People need to be saving, and they are not saving," he said.

"The primary drivers of job growth are in retail, construction and finance. When those three drivers go away, it's going to be ugly. You have a lot of people getting over their head thinking that appreciation will bail them out, but that wealth is going to go away," he said.

Thornberg expects a big decline in housing-market activity, primarily in resale homes.
"When this real estate boom does come to an end, as it inevitably must, the economy is going to feel the impact directly and indirectly in almost every sector of the economy. In many ways, the forecast for California is dominated by one question: When is the party going to end?" the report asked.

University of the Pacific economist Sean Snaith, director of the Business Forecasting Center at the Eberhardt School of Business, believes 2005 will be looked upon as the peak of the housing market in terms of new-home starts and appreciation in value.

Earlier this month, he predicted in his U.S. economic forecast that the "housing market soufflé" should peak this year and begin to cool off during the next three years.

"Our region is one of the stronger performers in California, and Stockton in particular stands out, being driven by population growth," said Snaith, who issues a quarterly business outlook focusing on San Joaquin County.

Right now, according to the Anderson Forecast, the housing market is at a crossroads. Keeping an eye on sales and inventory is the key. In the past six months, housing inventories have doubled while overall market activity has been flat statewide, despite a high pace.

Some of the most expensive markets in the country, such as San Diego and the Bay Area, are still seeing appreciation in home prices but total sales falling off.

The quarterly Anderson Forecast also looked at the national economy, predicting a "soft landing" for the housing sector when the bubble bursts.

UCLA senior economist Michael Bazdarich, writing on U.S. conditions, said the bottom line for the nation calls for an improvement in our trade deficit due to slower consumer spending, followed next year by a decline in housing activity. He expects economic growth over the next two years to be in the mid-2 percent range.

The report touched briefly on the effects of Hurricane Katrina, which should amount to little economic impact in California or the nation in the long run.

"Katrina will work to slow U.S. growth in late 2005 and boost it in 2006 and 2007," the report said.

A lot will depend on how long gasoline prices remain high. At $3 a gallon, the price has finally hit the inflation-adjusted price of the early '80s.

"As long as Americans have the time to adjust to the new realities, we don't expect much secondary effects. After all, remember that Europe and Japan have been paying much higher prices than Americans for years," the authors said.

Builders say state and local government to blame for housing crunch

Thursday, September 1, 2005
Last modified Wednesday, August 31, 2005 8:18 PM PDT

By: GIG CONAUGHTON - Staff Writer

SAN DIEGO ---- Demanding more land to build on and fewer regulatory fees, building officials Wednesday accused state and local governments of creating a housing crisis in California that is making first-time home buyers an "endangered species."

Standing in front of a sign showing the black silhouette of a family holding hands emblazoned with the words "Missing: First-time home buyers," leaders of the Building Industry Association said builders want to build homes that people can afford ---- but government has made it impossible.

Wednesday's event, held in front of the Boardwalk Housing Community in San Diego, was the kickoff of a statewide campaign by the building association, a statewide trade organization.

The association hopes to collect signatures from people up and down the state to force Gov. Arnold Schwarzenegger and the Legislature to fix the housing market that has seen prices double and even triple in recent years.

The median price of a single-family home in North County was $624,000 in July, according to the most recent figures from the North County Association of Realtors.

Tim Coyle of the California Building Industry Association and Scott Sandstrom of the San Diego County chapter of the association said Wednesday that the skyrocketing prices were the government's fault.

They said state and local governments have made it too hard for builders ---- by charging them tens of thousands of dollars in fees, taking decades to approve projects, not making enough land available to build on, and allowing "frivolous" lawsuits that cause more years of delays.

"As builders, we want to help first-time home buyers," Sandstrom said. "We must break down governmental barriers to do that. They're blocking the opportunity of home buyers to own a home."

Coyle said the association was endorsing several state bills that would reform current development laws by requiring courts to review building fees if they're challenged and to streamline environmental laws for city housing projects.

Mitch Mitchell, meanwhile, of the San Diego Chamber of Commerce, said that unless the state and region find ways to produce more homes that people can afford to buy, it could wreck San Diego County's economy.

Mitchell said the high prices will force businesses to relocate because their employees won't be able to find homes.

"We have a vibrant economy here in San Diego, with low unemployment and a growing technology center," Mitchell said. "But our economy will be dead ---- it is in jeopardy (now) because an important piece of our economy is employees. And an employer's ability to retain and recruit quality employees is vital to our survival."

Government officials reached after Wednesday's news conference said builders had legitimate points about governments throwing obstacles in the way of development.

But they also said they thought it was wrong to blame the entire housing crunch on government.

"I would say that's an oversimplification," said Ivan Holler, the county of San Diego's deputy director of planning and land use. "There are a number of things you can point to. When you start talking about the high housing costs in Southern California, hey, a lot of people want to live here."

Report: Real estate bubble may burst within next 2 years

By RACHEL RASKIN-ZRIHEN, Times-Herald staff writer
Vallejo Times Herald

Vallejo's is among the nation's riskiest real estate markets, according to a new analysis by a California mortgage insurance firm.
The Vallejo/Fairfield area has a nearly 48 percent chance of seeing real estate prices drop in the next two years, the report indicates. But, says Solano Association of Realtors president Corrine Oakes, that means there's a better than 50 percent chance they won't.

In Napa, odds are better than 50-50 that home prices will drop in the next two years, the study shows. Napa's 54 percent chance is barely beat by Boston, which tops the list with 55 percent.

When home prices become unnaturally inflated and outpace most people's ability to afford a home, prices may start falling, said Beth Haiken of PMI Group, which released the study.

"Home price appreciation has just been very, very strong in the last five years. They've gone up 83 percent in five years in the Pacific region and 70.3 percent in New England," Haiken said.

California tops the 10 states most at risk for a housing price decline, containing six of the riskiest areas, the study shows. These areas include Oakland, San Francisco/peninsula, San Jose, San Diego, Santa Ana and Riverside.

Haiken said the study looks at three predictive factors - home price appreciation, the labor market and home affordability - to determine an area's risk of falling home prices.

The information is taken from the Office of Federal Housing Enterprise Oversight, Bureau of Labor Statistics employment data and an Affordability Index that PMI developed.

"We look at the median home price compared to what it was in 1995, and how much of a difference there is between the average income and housing costs," Haiken said. "When those numbers get way out of balance, (the market) starts to get risky."

Haiken said that while the Vallejo area has experienced significant real estate appreciation in the past several years, the area's employment growth is good.

"The affordability leg is weak, though," Haiken said. "When home prices start to outstrip incomes by so much, you begin to see changes in the market."

The Boston and San Diego metro areas each have a better than even chance of seeing real estate prices decline in the next two years, according to the study. Those figures put Boston first and San Diego third in the company's listing of the nation's riskiest markets.

There is a 1-in-5 chance of declines in the Washington area. All three areas have seen rapid increases in home prices in recent years, and the PMI analysis suggests they might not be sustainable.

Historically, the market seeks to correct that kind of disparity, usually by bringing down home prices, since incomes rarely rise to meet home prices, Haiken said.

"There's a herd mentality in real estate - when they sense problems, they stay away," Haiken said.

Haiken said the study only predicts the direction of any likely market change, not its severity, she said.

At a better than 47 percent chance of a decline, the Vallejo area's risk is near the top, Haiken said.

Oakes, though, said local experts aren't too worried.

"No one locally is predicting a decline in home prices," she said. "We expect maybe a slowing of the increases."

PMI calculates its risk index using a computer model that takes into account current home prices, economic conditions and interest rates.

It found increasing risk in 36 of the nation's 50 largest markets, and a risk of 21 percent that the nation's median home price would fall in the next two years.

Making the list of the least risky states for a predicted housing price decline are Washington, Idaho, Wyoming, Utah, New Mexico, North Dakota, Oklahoma, Arkansas, Mississippi and Alabama.

Survey finds many would consider moving away

Wednesday, July 20, 2005
Last modified Monday, July 18, 2005 7:33 PM PDT

By: MARK WALKER - Staff Writer

NORTH COUNTY ---- Weary from traffic congestion and wary of ever-increasing housing prices, a majority of respondents in a recent survey of San Diego County residents say they have considered packing up and moving away.

Fifty-six percent of the 900 respondents in a telephone survey of randomly selected households countywide said the current median house price of $593,000 has them pondering a move out of the region. That's up from 39 percent in a similar survey conducted in 2002.

The latest survey, commissioned by the San Diego Association of Governments and conducted in May, found that while housing costs loom large, the No.1 concern for county residents continues to be highway congestion.

"The survey validates that housing and traffic continue to be the top concerns," said Gary Gallegos, executive director of the association of governments, the region's transportation planning and funding agency. "There's also less satisfaction and optimism about the region as a whole."

The association of governments earlier this year reported that motorists on the region's freeways spent nearly 50 hours sitting in traffic during peak commute times in 2004.

The effect of recent local scandals involving elected leaders also emerged in the survey, in which 13 percent cited concerns about confidence in their government representatives, up from 3 percent in 2002.

An 85-page survey report will be detailed in a gathering for reporters Wednesday and presented to the association's board of directors on Friday.

The survey attempts to gauge public opinion in a variety of areas that include environmental and economic issues, transportation, housing and public safety.

Thirty-nine percent of the respondents said they believed San Diego County would be a worse place to live in the future while 18 percent expressed confidence it would improve.

Among 13 specific issues, survey respondents said the most important was an adequate water supply followed by reducing crime and protecting beaches from pollution.

There are other signs that traffic congestion is changing the way business is conducted.

A San Diego firm, TalentFuse, is opening an office in Carlsbad on Wednesday solely because of the difficulties motorists face each day in traveling from North County to San Diego.

TalentFuse provides information technology workers in the high-tech industry and was forced to open the office in North County, said Brian Margarita, the firm's chief executive officer.

"Two or three years ago we didn't need that, but today employers in San Diego won't even consider a resume from North County," he said.

The market for information technology specialists is so hot, he said, that after a couple of months of working in San Diego someone living in North County will become so frustrated with the daily commuting grind that they quit for a similar job closer to home.

"Our San Diego clients say they don't want any resumes from someone north of the 5-805 merge," Margarita said.

The survey also underscores that housing costs are equally important in worker recruitment, according to Ted Owen at the Carlsbad Chamber of Commerce and Gary Knight of the San Diego North Economic Development Council.

"When we talk to businesses about relocating here their greatest concern is affordable housing and how people can get to work," Knight said.

Owen said he recently talked with the leaders of two biotechnology companies who said they each had to spend $3 million to $4 million in unplanned housing subsidies in order to convince workers they considered vital to move here.

"Recruitment is totally tied to the price of housing," Owen said.

Poway Mayor Mickey Cafagna, chairman of the association board of directors, said he fears the survey's suggestion of an overall declining quality of life may represent a battle that has already been lost.

"I had always hoped we could figure out a way to control traffic congestion and housing affordability, but every area of the country seems to reach a point where the quality of life regresses and people begin to leave," he said. "I'm afraid the same thing could happen here."

Other survey findings include:

- 80 percent of respondents would telecommute if their employers allowed it.

- 79 percent of commuters who responded drive alone.

- Flexible work hours were considered the best solution to reducing traffic.

- 48 percent of respondents favor "smart growth" development that locates housing close to transportation centers and jobs.

- 54 percent of commuters said they would pay to use a toll road.

The $35,000 survey was conducted by True North Research and has an error rate of plus or minus 3 percent, the association's Karen Lamphere said.

To get a look at the survey in detail, log on to http:www.sandag.org and click on publications.

Previous bubble burst may provide clues

Last downturn began around time of 1991 Gulf War
By Roger M. Showley
UNION-TRIBUNE STAFF WRITER
July 10, 2005

Benjamin Leaf has witnessed San Diego County's housing market through its ups and downs since he moved here from the East Coast in 1987.

The high school English teacher and avid surfer rented in Ocean Beach for eight years as home prices first soared and then soured in the early 1990s. Amid the market's downturn, he and his wife bought their first home, a 900-square-foot cottage, for $219,500 in May 1995.
"We were pushing the limits for us financially," said Leaf, 40.

But now, a decade later, after remodeling and refinancing, their bet has paid off several times over. The home on Brighton Avenue could fetch as much as $800,000.

"The housing bubble seems to be made of steel," Leaf said. "It may be a bubble that's not going to break."

Such talk defies history. Real estate is a cyclical business, affected by supply, demand, interest rates, economic conditions and personal tastes. And whenever someone thinks things never will change, they have a tendency to change just about then.

Many here recall a time not so long ago when San Diego's housing market soured after a boom that had prompted the same concerns about rising prices and a lack of affordability that are heard today.

The last real estate downturn in San Diego began around the time of the 1991 Persian Gulf War.

Then, the economy was saddled with double-digit interest rates while local jobs tied to defense contracting were evaporating with the close of the Cold War. As workers left for other cities, for-sale signs blossomed throughout the county. Meanwhile, housing developers were overbuilding in vast suburban tracts and a wave of speculative buying had hit the market.

With the exception of concerns about a new round of real estate speculation, those factors aren't present in today's more balanced San Diego economy.

Newspaper headlines at the time captured the swing from a robust market to a dream market for anyone able to buy a house. In 1989, the news was "Housing crisis seen as peril to economy" due to high prices and low affordability. By 1992, the story was "Million-dollar homes go begging."

Ocean Beach, known for its laid-back lifestyle and hippie heritage, is a good example when it comes to assessing the depths of San Diego's real estate downturn in the 1990s and the turnaround that has since propelled housing prices there and elsewhere into the stratosphere.

From the 1988-91 boom through the 1991-97 bust, the area within the 92107 ZIP code that includes Ocean Beach and Sunset Cliffs suffered the biggest crash in single-family resale prices, according to DataQuick Information Systems. Prices there fell 36.1 percent, from $244 to $156 per square foot. Since the bust, prices have shot up. The most recent value for Ocean Beach by square footage was $634 in May.

In the same boom-to-bust period, Poway recorded the lowest price drop in the county. There, per-square-foot prices fell 10.5 percent, from approximately $133 to $119. In May of this year, they stood at $361.

By contrast, DataQuick's monthly reports of overall median housing prices from 1988 to today reveal a decline in the early 1990s that was much less dramatic.

The county's overall median for all housing types fell only 2.4 percent, from a high of $170,000 in 1991 to a low of $166,000 in 1994 before the recovery began.

Market gyrations
Still, the turn of the market saw buyers no longer camped out at new housing tracts waiting to make deposits. Instead, builders offered discounts and sellers offered incentives to potential buyers. Through it all, real estate agents continued to say "now" was a good time to buy or sell.

"I think prices are at a low, interest rates are fabulous and there are so many good deals out there," incoming San Diego Association of Realtors President Marianne Eddy said in July 1993.

San Diego County Assessor Gregory Smith said that from 1992 to 1997, market conditions prompted him to reassess 208,000 properties below their purchase price, about 25 percent of all properties in the county. That action erased roughly $16 billion, or 10 percent of the county's overall valuation, resulting in a proportionate decline in property tax collections.

Since the market rebounded, all but 149 homes, 305 commercial properties and 25 mobile homes have been reassessed back to their purchase price and then some.

Smith, who recently announced the biggest increase in the assessed value of county properties in 25 years, said he doesn't expect a repeat of the 1990s bust because the demand for housing locally remains strong and the supply of homes is tight.
But there are those who are concerned about a real estate market that has pushed many potential buyers to the sidelines because prices are so high.

Marketing consultant Sanford R. Goodkin, who is dean of the local real estate industry with more than 40 years of experience, likened the 1980s housing surge to a "feeding frenzy" and the '90s downturn to a "marketplace pumping the stomach out."

Goodkin said the situation today is like that of a patient with high cholesterol and progressively constricting arteries who could eventually be facing a heart attack.

Looking back, the '90s downturn left the local real estate industry profoundly changed. Many independent, local builders changed jobs or moved operations to other states and regions. Real estate sales offices and franchises merged. As they did nationally, locally based savings-and-loan associations vanished.

Almost-empty condos
Those industry shifts affected individual buyers, sellers and builders in different ways.

One example is developer Michael Kriozere, president of Urban West, who built the 320-unit City Front Terrace at 500 W. Harbor Drive in 1993. He planned the project as condominiums, thinking the recently completed Horton Plaza shopping center, the new San Diego Convention Center and other downtown improvements would persuade people to buy and live downtown.

But when sales opened, almost nobody showed up. Interest rates were high, job security was shaky, and people weren't ready to pioneer downtown living in a big way.

"At that time, you couldn't sell anything," Kriozere recalled. "You couldn't give it away."

He sold his interest to his investors, who then operated the property as an apartment project until new owners took over in 2000. In a much-changed environment, the new owners sold the units as condos.

Barbara English was one of the early City Front Terrace renters. Then, in 2002, she bought a ground-floor unit at the complex for $410,000 that she figures is worth more than $600,000 today.

"My concern is there are so many buildings going up that eventually it's going to have to level off," English said. "I guess that frightens me, but I intend to stay here a long time and it's not going to hurt me."

Back in Ocean Beach, Leaf and his wife, Nora, a lab technician at Scripps Research Institute, also are thinking ahead. They now have two sons, Colin, 6, and William, 3, whose housing futures look grim if they are to remain here.

"If they don't go to medical school and become surgeons," Benjamin Leaf said, "if they don't find high-paying jobs, they won't be able to buy anywhere in Ocean Beach."

Or, perhaps, anywhere in San Diego County.

Report: San Diego-area economy won't remain robust without changes

Monday, June 20, 2005
Last modified Saturday, June 18, 2005 6:30 PM PDT

By: BRADLEY J. FIKES - Staff Writer

Houses most people can't afford. Traffic that makes commuters spend an average of an hour a day on the road. Students who don't understand basic science. These are the most threatening snakes in San Diego County's paradise. Business leaders have bewailed them for years as a long-range threat to the region's future economic competitiveness.

That future is getting closer, according to a June report from the San Diego Association of Governments. It warns that the region's robust economy will be unsustainable without making housing more affordable, reducing congestion and improving education.

What it says

The report rates San Diego and 18 other metropolitan areas on three elements: Economy, Environment, and Equity (roads, schools and other supporting infrastructure). Here's part of the scorecard:

Environment: The county's strongest suit, tying for first place with Seattle, up from third in the 2001 report. Scored high for environmental preservation and investment in water supply and wastewater management. Lost points for poor air quality.

Economy: Squarely in the middle, ranking 9th. Strong on venture capital; important for the region's technology companies. Poor on the level of education, ranked 13th. Poor record of investment in ports, airports and roads to move goods.

Equity: Near the bottom, ranking 16th. This is partly because of its high cost of housing, the least affordable of all 19 areas. Below-average record in early childhood education.

The report offered no solutions; its purpose was to point out the problems and describe them in an objective, quantifiable way.

While there's little surprising in the report, there was one unsettling conclusion: Since a similar report was issued in 2001, the region has not made any progress in solving its problems. And if those problems are not solved, the quality of life and business environment the county now enjoys will disappear.

Next step: Finding the solutions.

Housing and transportation

Where to live? How to get to work? You can't answer one question without the other.

So cities will tackle both issues at the same time, said Mickey Cafagna, SANDAG's chairman. For the first time, all local governments in the county have signed onto a plan to coordinate transportation and development projects.

Cafagna said he expects San Diego County to improve its transportation system because of its long-term commitment to spend $42 billion on roads and mass transit systems under the TransNet sales tax, a half-cent addition to sales taxes collected in the county. The existing TransNet tax was extended until 2048 under Proposition A, passed by voters last year.

On the development side, Cafagna and Alan Gin, an economist at the University of San Diego, recommend more mixed-use housing and higher-density development. One benefit of mixed-use is that it gives people the option of living where they work, Gin said.

Marney Cox, SANDAG's chief economist, said residential development can be encouraged, not only in San Diego, but throughout the state, by changing the way sales tax money is distributed. For every dollar spent, 1 cent goes back to the jurisdiction where the store is located.

"Cities compete heavily for sales tax and transient occupancy tax money from retail and hotel developments," Cox said. "They will bend over backwards to get 7-Elevens, regional malls, strip malls, all of em," Cox said. "At the same time they shy away from housing because it doesn't provide enough money to pay for ongoing services."

If the sales tax formula was changed to eliminate that advantage, Cox said cities would find it easier to make land-use decisions based on merit. The housing supply would increase, and California's persistent housing shortage would dwindle.

However, Christopher Thornberg, a senior economist at the respected UCLA Anderson Forecast, said the commonly accepted view of a housing shortage is a "red herring."

"What's lacking is low-rent apartments for low-skilled people," Thornberg said. That lack is caused by regulations and fees that add to the fixed cost of building apartments. With higher fixed costs, apartment builders naturally tend toward high-end units.

Thornberg said it would be a mistake to adopt a housing policy that assumes prices will constantly rise. San Diego is in a massive housing bubble, he warned, because the price of homes has become detached from underpinning fundamentals, such as rents.

"Prices have gone up 40 percent in the last two years, and there's no fundamental reason that real estate is worth 40 percent more now than in 2003," Thornberg said.

Education

Employers, especially in the high-tech and biotech fields, also complain that many local job applicants aren't adequately educated, so they have to import qualified people from elsewhere.

And across the board, young people from the area lack the "soft skills" such as communication and promptness, said Gary Knight, president and chief executive of the San Diego North Economic Development Council. However, he finds signs of progress in education, such as Guajome Park Academy in Vista, where he praised the students' attitude and command of language.

"They would make many of us appear inarticulate," Knight said of students in the charter school in the Vista Unified School District.

Cox pointed to High Tech High, a charter school in San Diego created by a group of educators and business leaders, as a model that deserves to be duplicated. The school stresses personal instruction, connection with the work world, and a focus on technology. More about the school can be found at www.hightechhigh.org.

Faulty Vision

No solution can work without the cooperation of the city of San Diego. The city has half the county's population and dominates the region economically. North County's umbrella tourism and economic organizations recognize this fact in their names: the San Diego North Convention & Visitors Bureau and the San Diego North Economic Development Council.

But San Diego is a troubled giant, struggling with a multibillion-dollar pension deficit caused by questionable accounting, giving it the unenviable name of "Enron-by-the-Sea." That's because its leadership sweeps problems under the rug until they become too big to ignore.

Diann Shipione, who raised the alarm about San Diego's pension deficit, was ostracized by the city's establishment for her pains. Shipione, then on the city's pension board, warned of the impending crisis in 2002. Dick Murphy, San Diego's mayor, declined to heed Shipione, preferring to disparage her.

In March, Murphy, who barely won re-election against Councilwoman Donna Frye, removed Shipione from the pension board. But Murphy, who campaigned under the slogan: "Leadership With 20/20 Vision," admitted in April his inability to solve the deficit. He announced he would resign on July 15.

North County example

It doesn't have to be this way