The Next Shoe to Drop: Commercial Real Estate

March 03, 2008 02:30 PM ET | Alex Markels | Permanent Link

I try to stay ahead of the curve.

Which is why, nearly two years ago, I wrote a piece on the impacts of the housing bust on the job market.

In short, I noted that all those millions of people who chased the real-estate boom—the newly minted real-estate agents, the mortgage brokers, the developers, and the construction workers—had added more jobs to the economy than had any other industry, at its height accounting for about 1 in every 10 jobs: a record, according to Moody's Economy.com. (In California alone, the number of real-estate brokers rose to more than half a million workers—more than the total number of homes sold in the state last year.)

"We're more dependent on housing than at any time in the last 30 years," Moody's chief economist Mark Zandi told me, "which could be a problem if the downturn becomes more pronounced."

Yet until just recently, it wasn't. While the folks I wrote about were forced to give up selling mortgages and houses, their lost jobs were offset by a continuing boom in commercial real-estate development. In San Diego, for example, while condo construction all but dried up, a dozen or more fancy new hotels and office buildings were rising into the skyline, offering jobs aplenty to many of those thrown out of work in residential construction.

Yet as several economists noted at the time, the commercial building cycle is far slower than the cycle for residential housing. Big buildings take years to get approval and years more to construct. "There's somewhat of a time lag here," Jay Butler, director of the Arizona Real Estate Center, said. "But everyone's eventually going to feel it."

Nearly two years later, we're doing exactly that as whatever backlog there was back then has been all but erased. And with demand for commercial space falling and credit as tight as it has been in more than a decade, new construction is slowing— with construction in January down by 1.7 percent, the largest decline in 14 years—as the massive commercial real-estate market slowly grinds to a halt.

The result isn't just more job losses in the real-estate sector—it's more write-downs for the banks that have financed the huge commercial projects. Indeed, today's Wall Street Journal suggests that the result will be yet another ugly round of write-downs for the banking industry as commercial property values decline by as much as 26 percent over the next two years.

All this isn't just to say I told you so (although I pretty much did, didn't I?).

State's jobless rate tops 6 percent

Governor speeds up planned construction to provide work
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER

January 19, 2008

Despite relatively strong job growth, the unemployment rate in California jumped above 6 percent last month, prompting Gov. Arnold Schwarzenegger to speed up construction projects that would result in the hiring of 5,000 new workers.

California employers added 15,000 new jobs last month, according to data released yesterday by the state Economic Development Department. The strongest growth came from educational and health care services, which added 5,900 jobs.

Nevertheless, the unemployment rate jumped dramatically, rising from 5.6 percent in November to 6.1 percent in December, because the number of people entering the work force were greater than the number of jobs being added.

“Never has California seen unemployment rise this drastically in a period that was not officially considered to be a recession,” said Christopher Thornberg, co-founder of Beacon Economics in Los Angeles. “This significantly diminishes the outlook for the state economy and state budget in 2008.”

In addition, the real estate and financial industries continue to deteriorate. Statewide, financial firms – including mortgage and real estate brokerages – cut 4,200 workers last month and construction firms shed 2,000 jobs.

To combat the job losses, Schwarzenegger ordered the accelerated release of $300 million in funding for roads, highways and other transportation projects, as well as $200 million for levee reconstruction.

Those funds are already in the budget, but were not slated to be spent this early in the year. Among the projects are a $25 million expansion of Interstate 5 in San Diego County.

“Speeding up construction of roads, schools and levee repairs will help our economy continue to grow and keep more people working,” Schwarzenegger said.

Schwarzenegger said he is also working with the Legislature to speed the release of $29 billion in unallocated funds from the 2006 infrastructure bonds.

“I have spoken with all four legislative leaders, and we are committed to acting quickly on removing regulatory and statutory hurdles that hinder investment in new construction in both the public and private sector,” he said.

Despite December's relatively healthy hiring pace, job growth in California was dismal in 2007. Payrolls grew only 0.5 percent, the slowest growth since 2003 and half the national rate of 1 percent. It was only the third time since 1995 that California's job growth lagged the nation's. In comparison, California employment grew by 1.7 percent in 2006.

“It's unusual for California to grow slower than the U.S.,” said Jed Kolko, research fellow at the Public Policy Institute of California, an economic think tank in Sacramento. “The main reason is that the housing slowdown is worse here than elsewhere.”

Kolko added that even though California's employment growth was slow last year, it was nowhere near as bad as it was during the recession of the 1990s and was even a bit faster than the sluggishness following the dot-com crash in 2000.

“We're doing a lot worse than the best of years, but a lot better than the worst years,” Kolko said.

But a report by the U.S. Bureau of Labor Statistics suggested that job growth in California may be slower than the state is reporting. A BLS study released Thursday shows that California added 120,000 jobs between June 2006 and June 2007, compared to 207,000 jobs reported by the state.

The state is slated to revise its 2007 data on Feb. 29, using updated information similar to that used by the BLS.

Stephen Levy, director of the Center of the Continuing Study of the California Economy in Palo Alto, said the BLS report provides an indication of what will happen after the state revises its estimates.

“For the state, job growth for 2007 is likely to be revised sharply downward, resulting in minimum job gains,” Levy said. “Job levels will be revised sharply downward for construction, finance and manufacturing.”

Levy expects the revised figures to show job losses in Orange County and large downward revisions for the Riverside-San Bernardino area. On the other hand, the new BLS figure for employment in San Diego last June is slightly higher than the number that the state reported at the time.

According to the data released yesterday, San Diego County continues to perform better than the state as a whole, although it has recently been lagging behind the national average.

Unemployment rose only slightly in the county, from 4.8 percent in November to 4.9 percent in December, not adjusted for seasonal hiring fluctuations. In comparison, the unadjusted rate was 5.9 percent for California and 4.8 percent for the nation.

Murtaza Baxamusa, director of policy research at San Diego's Center for Policy Initiatives, said that if the local rate were adjusted for seasonal changes it would be higher, since it would not include the temporary hiring of retail workers for the holiday season.

In the past year, the county added 14,600 salaried jobs, for an increase of 1.1 percent. Last month, the county added 1,800 jobs, on a seasonally adjusted basis, led by 800 new jobs in professional, scientific and technical services and 600 in health care.

But local real estate brokerages cut 400 workers last month. Administrative and support services were down 400, telecommunications resellers 200, construction firms 100, and information technology firms 100.

Federal agency grants San Diego vouchers for low-income housing

The Associated Press
Article Launched: 10/11/2007 11:39:30 AM PDT

SAN DIEGO—The U.S. Department of Housing and Urban Development will issue San Diego enough vouchers to help pay the rents of more than 1,350 households living in city-owned public housing.

The change gives the San Diego Housing Commission more control over municipal housing.

Tenants will be offered a choice between remaining in city-owned units or using vouchers to rent private apartments or houses. Private landlords, however, are not required to accept the vouchers, which carry regulations on how much the city will pay toward rent.

The Housing Commission received word last month from HUD that the public housing would no longer be under federal oversight. The agency this week guaranteed the city federal subsidy vouchers to help tenants move into private accommodations.

San Diego has struggled to operate its public housing program as federal funds for the program have sharply declined.

Housing Commission chief Elizabeth Morris said she expects most of the 4,000 people living in the city complexes to stay where they are while they weigh the pros and cons of moving. Residents who choose to stay would continue to pay 30 percent of their income toward rent.

Public housing residents who choose to move into privately owned housing must remain within the city of San Diego during the first year they have a voucher. After that, they can apply to move elsewhere in the county.

San Diego's housing agency becomes one of only a few in the country that have made the break from federal control.

San Diego gets OK to control public housing

By Lori Weisberg
UNION-TRIBUNE STAFF WRITER

September 14, 2007

Decades of federally subsidized public housing likely will end in San Diego after the U.S. housing department decided this week to let the city's Housing Commission divorce itself from the program.

The changeover would place the city's 151 rental complexes entirely under the control of the commission while giving it the financial freedom to expand the number of affordable housing units for low-income households.

The transition away from public housing, however, will not affect the more than 1,300 low-income households that would continue to have their rents subsidized either in commission-owned complexes scattered throughout the city or in rental units of their own choosing.

The city still must secure approval for 1,366 vouchers needed to subsidize the rents of people living in public housing. San Diego's 1,366 public housing units are occupied by a little more than 4,000 individuals.

If the vouchers are awarded, San Diego's would be one of only a few housing agencies in the country that have made the break from federal control. Only two other housing authorities – one in Georgia, the other in the Northwest – have left the program, according to officials of the U.S. Department of Housing and Urban Development.

The push to move away from conventional public housing comes at a time when federal funding has steadily diminished, hamstringing the housing agency's ability to properly maintain its rental complexes in neighborhoods from San Ysidro to Carmel Valley.

Most recently, the commission, like similar agencies nationwide, has been getting just 84 percent of the funds needed to operate its public housing complexes; it expects its allotment to fall even further.

“I'm pretty excited about the financial stability we'll get and that public housing won't bankrupt the Housing Authority,” said Elizabeth Morris, the commission's chief executive officer. “To do that and at the same time add affordable housing to our inventory and serve the same number of extremely low-income families, what could be better?”

Morris said she's hoping the city will learn in the next month or two whether its request for the vouchers will be granted. She said she knows of no other competition for the special funds allocated for rental vouchers when public housing is phased out.

Although no other agencies in the country have requests pending to leave the federal program, a number of authorities have inquired about the possibility, said Orlando Cabrera, HUD's assistant secretary for public housing and Indian affairs.

HUD gave its approval to San Diego, he said, because “it made its case that it's a tool they think will help their community. Their motivations would be less of an issue than the fact they have 151 properties that would not serve the folks in San Diego as well as vouchers would in the private marketplace.”

In making its case to HUD, the commission argued that its plan would create additional housing opportunities beyond those for the tenants in public housing now being served.

As tenants moved out and used their vouchers for housing in the private market, the commission said it could replace those renters with a wider range of low-income households earning up to 80 percent of the area's median income, or $56,150 for a family of four. Most public-housing tenants earn less than half that amount.

Where San Diego now receives on average of $450 a month per public housing unit, including the rent paid by tenants, the city could realize between $603 and $1,601 a month, depending on the location, size of the unit, and income level of the renters, according to the commission.

Current residents who choose to stay, however, would continue to pay 30 percent of their income toward rent. Housing officials point out that the city would also be able to borrow against its public housing complexes, valued at more than $124 million, to build or purchase at least 350 housing units affordable to both low-and middle-income families.

“My concern at first was that I want to make sure we're not losing affordable housing,” said San Diego City Councilwoman Toni Atkins. “I feel more comfortable now. But I don't want public housing residents to suffer, so the commission has to present a plan as to how these transitions will occur and whether we'll get the vouchers.”

Before presenting its plan to HUD, local housing officials met several times with residents of public housing to explain the proposal and reassure them that they would be able to stay.

Although San Diego is one of the first major U.S. cities to restructure its public housing program, it was one of the last to build such housing. Where many large cities began erecting massive, tenement-style projects in the 1930s and 1940s, San Diego's first public housing complex didn't open until the early 1980s. By then, policy-makers had shifted from building massive high-rise apartment complexes to low-rise developments, a concept adopted here.

“I think the history of public housing has made it eminently clear we're better off with mixed-income developments than highly dense, very low-income communities,” said San Diego affordable housing activist Richard Lawrence

Getting a loan grows much more difficult

By Roger Showley and Emmet Pierce
UNION-TRIBUNE STAFF WRITERS

August 14, 2007

San Diego County home prices and sales continued their downward slide last month as home buyers found it increasingly difficult to navigate the volatile mortgage market.

New-home sales were at their lowest level in five years, and the rate of homes in the county that sold for a loss over their previous sale was six times higher than a year earlier, DataQuick Information Systems Reported.

Some industry insiders who are concerned by tightening credit markets expressed pessimism about the short-term outlook, while others saw rays of hope for an upturn, noting that San Diego had led the California housing-price drop and now may be stabilizing.

In its report yesterday, DataQuick found that July's overall median home price for the county stood at $489,000, down from $495,500 in June and $500,000 in July 2006.

The drop was led by a pullback in resales – down 1.8 percent year-over-year for houses, with a median of $550,000, and condos, with a median of $377,250.

At the same time, buyers shifted away from lower-priced condo-conversion sales, which led to a year-over-year increase in prices in the new-home category to $425,500, compared with $400,000 in June and $425,000 in July 2006. Fewer conversions also drove the new-sales count down to 624, the lowest for any month since February 2002. Resales also were down from a month ago and a year ago.

DataQuick analyst John Karevoll interpreted the prices and sales as a sign that San Diego real estate may be nearing the bottom of the post-boom period.

“Most of the declines in San Diego have happened,” Karevoll said. “Now it appears to be re-establishing a balance that we have yet to see for the (Southern California) region.”

As home prices have fallen, credit has tightened, creating what some describe as a “double whammy” for real estate markets that saw huge run-ups in prices during the recent housing boom.

The credit crunch that began in the subprime market, which appeals to home buyers with blemished credit, now has spread to the prime market, leaving some buyers scrambling for financing.

San Diego County buyers have found that jumbo mortgages – loans that exceed the $417,000 limit that can be purchased by federally chartered Freddie Mac and Fannie Mae – are more costly to come by.

“Jumbo mortgage money is still out there but the price of it is more dear,” said Keith Gumbinger, vice president of HSH Associates, which monitors the national real estate market.

The recent meltdown in the subprime market has rattled the stock market as well, causing drops in trading values last week as investors worried about whether tighter credit would undermine the overall economy.

David Seiders, chief economist for the National Association of Home Builders, said many sales of new homes around the country are falling by the wayside as lenders tighten their financing programs.

“We are hearing that a lot of homes that had been sold, presold before completion, and financing had been arranged; now those loans cannot in fact be made,” Seiders said. “So the builders are now sitting with inventory they thought they had sold.”

The credit crunch has had less impact on people who can purchase homes with “conforming” loans of less than $417,000, said Zoltan Pozsar, senior economist for Moodys.com. The higher cost of nonconforming jumbo loans “affects areas where house prices are out of line with fundamentals, like San Diego, like pretty much all of California,” Pozsar said.

Although consumers in pricey California often complain that the low-conforming limit makes it more expensive to buy a house, lifting it has yet to gain traction in the federal government.

“People in the heartland don't have much sympathy for California home buyers,” said Keitaro Matsuda, senior economist of Union Bank of California.

In the first half of 2007, 35.6 percent of all primary mortgage loans in San Diego County were jumbo loans, said DataQuick's Karevoll. That compares with Los Angeles County at 46 percent, Orange County at 59.5 percent and the San Francisco Bay Area at 77 percent.

Longtime San Diego mortgage broker Martin Lopez said it's much harder to secure a home loan than it was several months ago. Before subprime loans began to fail, lenders were eager to sell loans that could be packaged as mortgage-backed securities and sold to Wall Street investors.

“There were very liberal guidelines” regarding debt-to-income ratios and credit quality, Lopez said. “People are having to prove their income now. They are having to prove their assets.”

Carlsbad-based home builder Barratt American now has a sales cancellation rate of about 25 percent, just slightly higher than normal, said President Michael D. Pattinson.

Sherman D. Harmer Jr., president of Urban Housing Partners, is involved with two condominium projects under way in downtown San Diego: Smart Corner and Sapphire Tower. He said tighter credit has slowed the sales process.

“We've gone back to our lenders, Countrywide, Wells Fargo and U.S. Bank, and tried to reconfirm with them if they have changed their underwriting standards, what kinds of loans are available, how processing has changed,” Harmer said. “There is a whole repositioning and restructuring of the loan process. It has been a moving target.”

The Federal Reserve Bank's July survey of senior loan officers, which was released yesterday, showed that more than half of responding banks had tightened their standards for subprime mortgages.

The survey found that nearly 41 percent of the banks had tightened standards for nontraditional mortgages, including interest-only mortgages, adjustable-rate mortgages and “Alt-A” loans, which require less stringent documentation of income. About 14 percent of banks said they had tightened their lending standards “somewhat” on prime loans over the past three months.

Meanwhile, consumers could cheer declining gas prices and mortgage interest rates – at least those that apply to loans that are less than the $417,000 limit. Freddie Mac pegged the average mortgage rate last week at 6.59 percent, down from 6.68 percent the week before.

In another sign viewed as positive, the San Diego Association of Realtors said there were 20,533 homes for sale as of yesterday, 10.7 percent fewer than at this time last year and the third straight month showing a year-over-year inventory decline.

“People who are in the market to sell are people who really want to sell, not investors testing the market,” said David Cabot, the association president.

But some investors have thrown in the towel and backed out of their real estate gambits, lifting the sold-at-a-loss percentage sixfold from a year ago, according to DataQuick.

Last month, 18.2 percent of homes sold locally went for less than their previous purchase price, DataQuick said. That compares with 3.3 percent of the homes sold in July 2006. The median loss suffered by sellers on these sales was $68,250.

Steve Shaffer, a real estate agent and mortgage broker in University City, handled one such case, a home on Governor Drive that was bought for $659,000 in May 2005 and sold last month for $575,500, a 12.7 percent loss.

“They bought it as investment,” Shaffer said of the sellers. “They realized that in this market, it wasn't a good investment.”

Other owners have fallen behind in their payments or let their homes go into foreclosure.

In South Bay, where all communities but Imperial Beach saw price drops in July, short sales are preferable to foreclosures, but banks have to be willing to take less than the outstanding loan balance to allow a short sale to proceed, said Scott Vinson of Coldwell Banker-Royal Realty.

“I think our eastern region of Chula Vista had a pretty hard blow,” Vinson said, referring to a spate of foreclosures there. “I'd think we'd be able to come back a little sooner than other parts of the county.”

Scary monsters looming above city

High-rise buildings block light, destroy community

Mary McFadden

Sunday, July 1, 2007

A huge, scary monster is growing in San Francisco's South of Market area. Like an atomically deranged creature from a 1950s horror movie, the first of the Rincon Towers is oozing upward, sucking light from sky and street. Its three-block shadow chills the hearts of all who pass under it, even for a moment.

Bred for expensive, high-density housing in a joint venture by the mad scientists at the Board of Supervisors, the Planning Commission and real estate speculators from San Diego, the black blob makes it obvious that urban planning in San Francisco is run by the Boys from Brazil and architects who used to design sippy cups for Satan.

They're selling exactly what they are destroying -- the community and the view.

Community is not fostered by stacking residents as if they were cans in a gourmet supermarket. Community is not created by designs that separate people, that put people into cars, into garages, into elevators, into their condos. Community is not encouraged by allowing real estate speculation to override sensible and sensitive design.

The view from the towers is not of the towers. They look down and out at lesser entities. When the Transbay Tower comes along, these three buildings will block the Bay Bridge and darken downtown.

Now that they have a foothold, these monstrosities have become the example rather than the exception. San Francisco's waterfront will be visible only from the East Bay. If we are not careful, San Francisco will steal Oakland's infamous tagline, "There is no there there."

"Manhattanization" made high-rises glamorous. San Francisco's urban plan ignores a glorious geography in favor of an "interesting" skyline but characterless streets. Sunlight never touches a large portion of downtown sidewalks. Inaccessible tops of buildings are considered public open space. The wind, present even on still days, is the digestive by-product of these now relatively small monsters.

Insensible rules, regulations and planning processes have flattened the city. Our famous hills have disappeared. The skyline, which once offered a rolling glissando of color and light, now looks like a series of bruises on a lame leg. Neighborhoods have lost so much open space and greenery that birds have moved away. This is good news for adaptable bugs, rodents, skunks and raccoons, but not good for people and pets.

Things have gone dreadfully wrong, and while there's nothing to be done about buildings in progress until nature shakes them down, we can demand an urban plan and building codes that add grace and life to our city. Great design accommodates need and embraces beauty. It does not trample upon the psyche.

The traditional -- our bright, fussy Victorians, the elegant Edwardians, the craftsman bungalows, the sleek moderns -- must be preserved, because these are the fragile, primary documents of history and icons of culture. Contemporary ideas can and must work with past ideals, as they do in Barcelona, London, Mexico City and Vienna.

Rincon Towers' baby brother is due shortly. The Transbay Terminal is scheduled to be twice the size of the scary monster already blotting out the sky. Be afraid. Very afraid.

What Could Save the Housing Market

We don't have to look back very far to spot a potential blueprint for the federal government's reaction to a housing-led slowdown.
By Rich Toscano

Wednesday, May 16, 2007 | The speculative housing bubble that launched San Diego home prices so high is now in the process of deflating. Prices have been on the decline for over a year, but they remain well above the levels that would be justified by the economic fundamentals now that the bubble-era forces of rampant buyer optimism and unsustainably lax lending are disappearing before our eyes.

Using the analytical framework described above, and considering the precedents set by past boom/bust cycles in the San Diego housing market, it sure seems that the most likely outcome is for San Diego home prices to continue declining for some time to come. But nothing is ever for certain in the financial markets, so today I'd like to discuss the following question: what could prevent a serious decline in home prices?

As I see it, there are two potential factors that could help out the housing market.

The first is economic growth. If home prices are too high in comparison to rents, incomes, and other fundamentals, then it's at least possible that those fundamental factors could rise to meet home prices rather than the other way around.

The problem is that this just isn't very likely. Home prices are so out of line with rents and incomes that, given the current pace of their growth, it would take many years for rents and incomes to catch up. Meanwhile, the oversupply of inventory (especially that of the must-sell variety) would be exerting downward pressure on prices the entire time.

The only way that economic growth could single-handedly bail out the housing market would be for regional economic activity, employment, and incomes to grow in great excess to their current levels. Such a gold-rush style boom is certainly within the realm of possibility, but it's not an outcome that I would consider likely.

The second factor that could aid housing market is government intervention.

We don't have to look back very far to spot a potential blueprint for the federal government's reaction to a housing-led slowdown. In the aftermath of the 2001 recession that followed the bursting of the stock market bubble, the Federal Reserve slashed short-term rates to levels not seen since the 1950s. Such ultra-low rates encouraged consumer borrowing that, in combination with rampant federal deficit spending, helped to keep overall demand aloft and to end the recession in fairly short order.

Of course, this technique had some unintended consequences (a housing bubble, record-shattering debt levels, and a structurally weak U.S. dollar come to mind). But I don't expect such nitpicking to stop the folks in Washington from using the same playbook again should the housing-related pain become too uncomfortable for their constituents to bear. Let's look at the actions of the Federal Reserve and Congress in turn.

The Federal Reserve will want to lower their short-term federal funds rate. In the case of a housing bust, lower short-term rate would be of key importance to the hordes of adjustable-rate mortgage holders who are facing higher payments once their loans reset. Jamming short-term rates back down to 2003 levels would certainly prevent a lot of foreclosures.

If things got bad enough and lowering the fed funds rates didn't do the trick, Federal Reserve chairman Ben Bernanke could even implement some of the more radical policy suggestions he made in his seminal 2002 "helicopter drop" speech, such as setting long-term as well as short-term rates and directly intervening in the mortgage market.

It all sounds easy enough, but the truth is that the Fed can't lower rates (let alone enact any of Bernanke's proposed pull-out-the-stops policies) with impunity. Lowering short rates tends to cause the dollar to fall and inflation to rise. Here in 2007, the dollar is a lot weaker and inflation notably higher than in 2003 when the short-term rates plumbed their lowest depths. It's doubtful that the Fed could do anything as drastic as they did after the stock market bust, but it's still likely that they will lower rates to the extent that they are able.

For its part, the people in Congress can continue to do what they do best: spend money that they don't have. There have been few repercussions to such an approach so far, and until there are, the government can be expected to keep on spending -- especially if times get tougher. In general, borrowing from the future to spend in the present tends to provide a short-term stimulus to the economy. Given that "short-term" is the typical politician's favorite timeframe, this approach is a crowd favorite.

A housing bust would provide even further temptation to spend money directly on attempts to address the market itself. Some of our more eagerly opportunistic leaders are already scrambling to throw taxpayer money at the subprime mortgage problem, but the list of potential opportunities for federal largesse is nearly endless. Our leaders could stoke housing demand by offering tax breaks or direct subsidies to potential home buyers. They could help out struggling homeowners by increasing the already generous tax breaks that owners are granted. They could force lenders to extend mortgage teaser-rate periods or allow lower monthly payments for troubled owners. They could put a moratorium on foreclosures (an early variation on this theme is already taking place in Massachusetts, where the state is demanding that lenders delay the foreclosure process by up to two months for any borrower that files a complaint with state bank regulators). They could direct government-sponsored mortgage purchasers Fannie Mae and Freddie Mac to loosen their standards to keep mortgage credit freely available. And if too many private lenders got into trouble, the government could affect an industry bailout as they did with the savings and loan industry in the late 1980s. The list goes on.

Keeping rates excessively low and increasing deficit spending could work for a more fundamental reason. Both activities tend to result in more money being created and spent into the economy. To the extent that there are more dollars chasing the same amount of goods, each dollar becomes worth less in comparison to those goods. This reduction in dollar purchasing power is more commonly known as "inflation."

If the government's tactics were to cause inflation to pick up the pace, incomes and rents might quickly rise in dollar terms. This could allow the fundamentals to catch up to home prices without the latter falling too steeply. It's not that great to own a home whose price is stagnating while the price of everything else is rising, but it's probably better than owning a home whose price is falling outright. (Of course, higher inflation would tend to increase interest rates, but as described above, various legislators and Fed chairman Bernanke have already pitched the idea of forcefully keeping mortgage rates low.)

The potential interventions are many, varied, and complex. And unlike an explosion of local economic growth, at least some degree of monetary easing and housing-oriented deficit spending will be almost inevitable if things get bad enough in the real estate market.

What effect the interventions will have is another question. Meddling with the market rarely works out exactly the way it was intended, as witnessed by the housing bubble and the other economic distortions caused by the government's stimulative efforts from 2001-2003. And as we've seen with the subprime debacle, the government rarely reacts to something until after it's a crisis, so there could be some issues of closing of metaphorical barn doors vis-à-vis the whereabouts of certain metaphorical horses.

We have a long way to go before home prices once again meet up with their fundamentals, and there's no way of knowing exactly what path will be followed to that destination. The point is that while there will likely be tremendous downward pressure on home prices, it's important to acknowledge that there could be some forces putting pretty serious pressure in the other direction.

Settlement would limit number of condo conversions

Accord requires survey of tenants
By Lori Weisberg
UNION-TRIBUNE STAFF WRITER

March 29, 2007

SAN DIEGO – Condo conversions in San Diego would be limited to no more than 1,000 units a year under a tentative settlement approved by the City Council on Tuesday.

The settlement, considered in closed session, is intended to end litigation against the city over how it reviews proposals to transform rental units into for-sale condos.

A coalition of environmental and affordable-housing advocates represented by attorney Cory Briggs argued that the city had failed to formally review each conversion project to assess what potential effects projects might have on the environment.

Before the lawsuit can be dismissed, the City Council must put into law a yearly limit on condo conversions. In addition, an ordinance must be adopted that would not allow approval of conversions until after landlords have surveyed their tenants to learn what effects the conversions might have on renters. The city would then issue an annual report on the survey results.

Under the agreement, the city will reimburse those bringing the suit $75,000 in legal fees and related costs.

“Full implementation of the settlement will end the need for litigation over future condo-conversion waves by preventing future waves from ever rising in the first place,” said Briggs, who represents the Affordable Housing Coalition of San Diego County and Citizens for Responsible Equitable Environmental Development.

Unaffected by the settlement are three other lawsuits filed by Briggs against condo converters dealing with the same issue of environmental analysis.

The lawsuit naming the city was one of two suits tossed out by a Superior Court judge last year, although Briggs appealed the ruling.

While San Diego and other cities in the county have been a magnet in recent years for developers seeking to convert rentals into for-sale housing, the overall real estate market slowdown has dampened interest in condo conversions.

“In the heyday, we were getting 20 or 30 applications a month, and since July or August, it's in single digits,” said Mike Westlake of the city's Development Services Department. “So there's definitely been a slowdown. Instead of four or five or six a week, we maybe get one a week, and that number will probably go down even more.”

Last year, applications for condo conversions accounted for about 1,800 units. So far this year, there have been six projects proposed, although two of those call for the conversion of more than 1,200 units in Mission Valley, according to city records.

Jim Waring, who oversees land-use issues for Mayor Jerry Sanders, said he expects that the ordinances required under the settlement will come back to the council within 60 days.

“This has been a great distraction and not a very productive use of our time,” Waring said. “We're settling the case so we can eliminate the distraction and focus on other things we think are more important.”

S.D. economic indicators fall for 10th straight month

By Dean Calbreath
UNION-TRIBUNE STAFF WRITER

March 16, 2007

San Diego's leading economic indicators fell for the 10th month in a row in January, dragged down by a weakening employment outlook and the continuing decline in the housing market, according to a report yesterday by the University of San Diego's Burnham-Moores Center for Real Estate.

Economist Alan Gin, who compiles the monthly index of indicators, attributed the decline to the downturn in local home sales, which is beginning to have a ripple effect through the rest of the economy.

“The interesting thing is the impact of housing on the economy,” Gin said. “In employment, not only construction and real estate are down, but you're also seeing an effect in the retail sector. And help wanted advertising is down significantly in a lot of categories.”

Three of the six categories in the index worsened in January: residential building permits, help-wanted advertising and unemployment filings. In contrast, there were improvements in consumer confidence, local stock prices and the outlook for the national economy.

But the three latter categories have all declined in recent weeks.

The stock market has turned choppy, especially for small or mid-sized technology companies – precisely the type of companies that are based in San Diego. The national economic growth rate for the fourth quarter of 2006 was recently revised downward to 2.2 percent, implying slow growth for the current quarter as well.

The increasing pessimism on Wall Street and rising gasoline prices have already dampened consumer confidence. The San Diego Union-Tribune's monthly consumer confidence survey – a component of Gin's index – rose 5.8 percent in January but fell 2.1 percent in February.

“January had relatively good stock prices and low gas prices, which helped consumer confidence,” Gin said. “It will be interesting to see what happens to consumer confidence with gas prices rising. There's usually about a 70 percent correlation between gas prices and consumer confidence. If the past is any sign, the prices will put a dent in confidence.”

The 10-month decline in the economic indicators has paralleled a 10-month decline in residential building permits, a sign of the weakening housing market.

“We're weak today, but I think we'll be through these problems in nine months,” said Marney Cox, economist at the San Diego Association of Governments. “Most of the declines are in construction and real estate, and I think we're beginning to see some stabilization there. By the end of this year, I'm expecting that we'll be through this.”

But Peter Schiff, who runs Euro Pacific Capital in Newport Beach, said the real estate decline will be an impact on the economy for quite some time.

“Think about all the mortgage debt that was assumed by San Diegans in the last few years,” he said. “All they're going to be doing is paying interest on that money. Instead of buying a new car or going shopping, they'll be paying down their interest on interest-only loans. And there are so many people who bought homes for zero down payment, they will just be going to be walking out of their homes, if they haven't already, since they have no financial incentive to stay. This is a real disaster.”

Initial claims for unemployment insurance have also risen 10 months in a row, pushing the jobless rate from 4.1 percent in December to 4.3 percent in January. Job growth slowed to a gain of slightly more than 13,000 jobs, compared with an average of nearly 18,000 for 2006 as a whole.

City takes stock of its real estate

60 lots identified for possible sale
By Brooke Williams
UNION-TRIBUNE STAFF WRITER

January 14, 2007

San Diego's real estate division is cleaning house, hoping to make millions on land that has languished for decades.

It has started pulling a list of property from its massive portfolio that could be considered surplus and giving public entities first dibs. The city, squeezed for cash by a crumbling infrastructure and billion-dollar pension deficit, hopes to put land on the market by June.

For families who live next door to city lots that have become neighborhood dumps and fire hazards, the sales could be a godsend. But hundreds of families who rent land on the list wonder what will happen to them if the properties change hands.

In the 5-year map to fiscal health that he outlined last fall, Mayor Jerry Sanders proposed selling land and signing new leases to make $102.5 million by 2012. The plan estimates land sales and new leases will bring in $15.3 million in fiscal 2008 and $21.8 million in the following four years.

The real estate department has been examining the city's properties lot-by-lot for several months, as part of a review that began after The San Diego Union-Tribune reported that the city did not have an accurate inventory of the 4,000-some parcels it owns.

So far, the city has identified about 60 parcels for government review on its Web site. They include vacant lots in neighborhoods, land around a reservoir, houses and a mobile home park. The city has owned a dozen of the lots since the 1950s and 1960s, and two back to 1915, county records show.

The prospects of a sale are bittersweet for Jasper Lee Adkins, 81, and his wife, Blanche, 78. In the fall of 1958, they moved into a city-owned, two-bedroom home that abuts Highway 94 in the Stockton neighborhood, east of downtown San Diego. Rent was $70 a month.

The city acquired the lot for public projects in 1963 but didn't end up needing it. During the next three decades, the couple said they sought to buy the land, but the city wouldn't sell. After they both suffered strokes, they gave up trying. Rent is now $616 a month.

When a reporter told them that the city now is considering selling the lot, Blanche said they'd still be interested after all these years.

“It would have been paid for by now,” she said, referring to their efforts to buy the land more than 40 years ago. “But I can do nothing about it; you just have to take it as it comes.”

The city owns five houses and a duplex that may wind up for sale. Also on the list are 180 acres of land in the Cleveland National Forest, lots in Dulzura, open space in Sorrento Valley and a border patrol building in San Ysidro.

One property is a vacant lot in Grant Hill that a woman gave to the city more than a decade ago so proceeds from its sale would benefit public parks and libraries. Since then, the lot has been used as an illegal dump.

The most people potentially affected by a sale are those who live in Linda Vista Village, a 220-unit mobile home park overlooking Tecolote Canyon. Many of the residents have low incomes. Some are retired; others are families with children. Some have lived in the 75-acre park since 1980.

On Friday, about two dozen residents gathered in the park's clubhouse to try to figure out what comes next. They had more questions than answers. Do we have first right of refusal? Could we buy the land as a group? Could a developer build condos and force us out?

“How many times can I start over?” asked William Perry, 58, who bought a double-wide home and moved to the park to retire in 1999.

Margaret Neville, a single mother of two teenagers, is on disability. She said she simply can't afford to move. “Where do we go?” she asked.

The city leases the park to Tecolote Investors for about $160,000 a year. The lease, which expires in 2034, requires the company to make one-third of the homes available to low-and moderate-income families. Tecolote Investors collects about $1.6 million a year from residents, who pay between $590 and $638 a month in rent, according to city records. The files also show it cost Tecolote about $480,000 to operate the park in 2003.

Jim Barwick, who started as director of the real estate department in May 2006, said it's too early to address the residents' concerns. He stressed that the city had not yet decided to sell any land, and there would be public meetings before it does. He said he was not aware of a law that would require the city to offer land to people who live in the houses or mobile-home park before putting it on the market.

According to state law, government agencies are first in line to lease or buy certain surplus city properties if they plan to use them for purposes such as affordable housing, schools, parks and open space.

If, after 60 days, no government entity is interested, the city would take a closer look at the land to be certain it was expendable and appraise it to see what it's worth. If it's a good financial move to sell or sign a long-term lease, the real estate department would bring a detailed proposal for each lot to the City Council for approval.

A policy adopted in 1983 calls for the city to sell most properties at a public auction. There are exceptions for landlocked slivers that only an adjoining land owner would want to buy and for land a government entity might want, such the border patrol building in San Ysidro.

Barwick said he planned to recommend the council change the auction policy to allow some land to be sold on the market, which could bring in more money.

The city charter requires that proceeds of land sales go into a capital outlay fund that pays for new public improvements, such as buildings and sewer pipes. It states that money from the fund can't be used for repairs, such as fixing the city's decrepit water lines, but it can go to replace them.

Barwick did not specify what capital projects might benefit from the sales.

City takes stock of its real estate

60 lots identified for possible sale
By Brooke Williams
UNION-TRIBUNE STAFF WRITER

January 14, 2007

San Diego's real estate division is cleaning house, hoping to make millions on land that has languished for decades.

It has started pulling a list of property from its massive portfolio that could be considered surplus and giving public entities first dibs. The city, squeezed for cash by a crumbling infrastructure and billion-dollar pension deficit, hopes to put land on the market by June.

For families who live next door to city lots that have become neighborhood dumps and fire hazards, the sales could be a godsend. But hundreds of families who rent land on the list wonder what will happen to them if the properties change hands.

In the 5-year map to fiscal health that he outlined last fall, Mayor Jerry Sanders proposed selling land and signing new leases to make $102.5 million by 2012. The plan estimates land sales and new leases will bring in $15.3 million in fiscal 2008 and $21.8 million in the following four years.

The real estate department has been examining the city's properties lot-by-lot for several months, as part of a review that began after The San Diego Union-Tribune reported that the city did not have an accurate inventory of the 4,000-some parcels it owns.

So far, the city has identified about 60 parcels for government review on its Web site. They include vacant lots in neighborhoods, land around a reservoir, houses and a mobile home park. The city has owned a dozen of the lots since the 1950s and 1960s, and two back to 1915, county records show.

The prospects of a sale are bittersweet for Jasper Lee Adkins, 81, and his wife, Blanche, 78. In the fall of 1958, they moved into a city-owned, two-bedroom home that abuts Highway 94 in the Stockton neighborhood, east of downtown San Diego. Rent was $70 a month.

The city acquired the lot for public projects in 1963 but didn't end up needing it. During the next three decades, the couple said they sought to buy the land, but the city wouldn't sell. After they both suffered strokes, they gave up trying. Rent is now $616 a month.

When a reporter told them that the city now is considering selling the lot, Blanche said they'd still be interested after all these years.

“It would have been paid for by now,” she said, referring to their efforts to buy the land more than 40 years ago. “But I can do nothing about it; you just have to take it as it comes.”

The city owns five houses and a duplex that may wind up for sale. Also on the list are 180 acres of land in the Cleveland National Forest, lots in Dulzura, open space in Sorrento Valley and a border patrol building in San Ysidro.

One property is a vacant lot in Grant Hill that a woman gave to the city more than a decade ago so proceeds from its sale would benefit public parks and libraries. Since then, the lot has been used as an illegal dump.

The most people potentially affected by a sale are those who live in Linda Vista Village, a 220-unit mobile home park overlooking Tecolote Canyon. Many of the residents have low incomes. Some are retired; others are families with children. Some have lived in the 75-acre park since 1980.

On Friday, about two dozen residents gathered in the park's clubhouse to try to figure out what comes next. They had more questions than answers. Do we have first right of refusal? Could we buy the land as a group? Could a developer build condos and force us out?

“How many times can I start over?” asked William Perry, 58, who bought a double-wide home and moved to the park to retire in 1999.

Margaret Neville, a single mother of two teenagers, is on disability. She said she simply can't afford to move. “Where do we go?” she asked.

The city leases the park to Tecolote Investors for about $160,000 a year. The lease, which expires in 2034, requires the company to make one-third of the homes available to low-and moderate-income families. Tecolote Investors collects about $1.6 million a year from residents, who pay between $590 and $638 a month in rent, according to city records. The files also show it cost Tecolote about $480,000 to operate the park in 2003.

Jim Barwick, who started as director of the real estate department in May 2006, said it's too early to address the residents' concerns. He stressed that the city had not yet decided to sell any land, and there would be public meetings before it does. He said he was not aware of a law that would require the city to offer land to people who live in the houses or mobile-home park before putting it on the market.

According to state law, government agencies are first in line to lease or buy certain surplus city properties if they plan to use them for purposes such as affordable housing, schools, parks and open space.

If, after 60 days, no government entity is interested, the city would take a closer look at the land to be certain it was expendable and appraise it to see what it's worth. If it's a good financial move to sell or sign a long-term lease, the real estate department would bring a detailed proposal for each lot to the City Council for approval.

A policy adopted in 1983 calls for the city to sell most properties at a public auction. There are exceptions for landlocked slivers that only an adjoining land owner would want to buy and for land a government entity might want, such the border patrol building in San Ysidro.

Barwick said he planned to recommend the council change the auction policy to allow some land to be sold on the market, which could bring in more money.

The city charter requires that proceeds of land sales go into a capital outlay fund that pays for new public improvements, such as buildings and sewer pipes. It states that money from the fund can't be used for repairs, such as fixing the city's decrepit water lines, but it can go to replace them.

Barwick did not specify what capital projects might benefit from the sales.

The Year in Housing

Real estate's great boom time came to an end in 2006. San Diego's experience exaggerated national trends just as it had during the time of skyrocketing appreciation.

By KELLY BENNETT Voice Staff Writer
Wednesday, Dec. 27, 2006

The year's beach season was in full swing before many in the county noticed a chill in a San Diego housing market that had been sizzling for years.

"The beginning of the year was still kind of jubilant from last year," said Michael Colby, economist at MarketPointe Realty Advisors. "No one really realized where we were until the middle of July."

That was when county homeowners started hearing negative news about the market -- substantiated news, at that.

"Before that, it was just experts saying, 'This is not sustainable,'" he said. "Now, the data actually showed a change."

Indeed, 2006 proved the end of an unprecedented housing boom. Gone were the years of booming home prices, sizable sales stats and frantic "flippers" overbidding on otherwise undesirable properties. Speculators vanished, potential buyers invested more time in their decisions and some whose jobs were created by the boom -- novice real estate agents or mortgage brokers -- found other work.

San Diego proved an extreme version of what was happening in markets across the country, as inflated markets started to cool after a similar years-long run of price appreciation. The national housing market, and its downturn, became a factor in discussions about the otherwise healthy national economy.

For the first time in a decade, the median price of a home dipped negative compared to the previous year. Year-over-year price declines continued monthly from June, eventually reaching a low point of $482,000 in November. That was a $36,000 drop from the previous November, according to DataQuick Information Systems.

Median prices weren't the only indicator of the slowing market. Many analysts considered a decline in sales activity the most concrete marker of a slowdown. The number of homes sitting unsold on the market soared to more than 23,000 units this summer before declining to about 19,000 in December -- 10 times as many homes as the market's lowest supply in 2004.

And 25 percent fewer homes sold in the first eleven months this year than in the same period in 2005. Home builders drastically scaled back their plans, slashed their profit outlooks and laid-off employees. To attract consumers to the homes that were sitting vacant, they offered incentives ranging from appliances to Hummers to cruises, allowing them to mask price concessions in earnings reports. Existing home sales struggled, too -- sellers hoped to garner the prices paid for their neighbors' homes during the boom, but many buyers waited to see if prices would fall further.

And so, homes took about 30 percent longer to sell than they did in 2005. Sellers of detached homes were looking at an additional two weeks or so, on average, before they could slap a "SOLD" sticker on their yard sign, according to the San Diego Association of Realtors. The association experienced a sales volume drop of 25 percent from January to November, a $5.7 billion difference from the same period in 2005.

The drop in demand -- and profit share -- among the county's estimated 10,000 real estate agents will force many out of the profession, experts say. Job losses in the real-estate related sector, including agents, mortgage brokers and construction workers, will have lasting, significant effects on the local economy, they project.

The Bearers of Bad News
Many in the real estate industry blamed the media for the negative mindset of their formerly enthusiastic clients. Newspaper, television and radio outlets reported data as soon as it was released by analysts, revealing the drops in sales rates and prices. Agents, builders and brokers lambasted those reporters, blaming the media for perpetuating a perception of doom for the housing market. The local Realtors' association and the builders' association teamed up on an advertising campaign, admonishing San Diegans that homeownership was an opportunity not to be missed, despite some negative trends.

"2004 and 2005 were incredibly overheated," said Charles Jolly, 2006 president of the Realtors' association. "We knew anything compared to that would be a huge downturn."

But the numbers didn't lie. The median price drops told a softer story than what was actually happening in the market, many said. The real estate boom had risen to blockbuster status in conversations around the water cooler and at cocktail parties, and media outlets were among those reporting the data that emerged -- and the hangovers associated with such a raging house party. The excitement about investing in real estate that had so easily spread through society for a few years shifted to a widespread feeling of uncertainty.

In these circumstances, convincing buyers to get into the market just for the sake of doing so will be a tough sell, said Peter Dennehy, vice president of the Sullivan Group Real Estate Advisors.

"The market as a whole has gotten the memo," Dennehy said. "It is very hard to convince someone that it's a good time to buy right now. That 'let's just get something,' 'gotta get in on the market' -- I think that perception is gone."

But Dennehy does, like Jolly, consider San Diego a "buyer's market."

"Buyers have a lot of choice; they know that they have the upper hand," he said. "It's always a good time to buy a house if you find a house you need at a price you can afford, if the home meets your needs."

Reaching for Affordability
In 2000, the overall median price for a home in San Diego County was $234,000. That price leaped up annually by 15 to 20 percent for years, landing at $494,000 in 2005. The median price soared a total of 210 percent during those five years.

And so, despite this year's market "softness", prices haven't come down all that much. The all-home median price for 2006 -- once December's prices are tabulated -- will likely still be within a few thousand dollars of the 2005 price, even if it is a bit lower.

As prices come down from epic levels, some say it will boost affordability in the region. But for many who were convinced the home appreciation train was never going to stop again, the price drops could be disastrous.

Mortgage lenders nationwide responded to runaway home prices -- and consumer fear of being priced out forever -- by offering creative loans. The appeal of these mortgages is that they allow borrowers to enter a housing market they might not have otherwise accessed through low monthly payments. Some choose to pay only the interest. Others pay only a portion of the interest accrued each month, meaning that their debt incurred actually grows -- rather than shrinks -- for a period as the loan ages.

These so-called "exotic" loans are founded on the assumption that real estate always goes up -- that by the time the loans are due to reset, the borrowers' home values will have increased enough that they can, if they need to, use that equity to refinance the loan and avoid the substantially larger payments ahead.

When those loans reset, the monthly payments can be kicked up by a few thousand dollars a month. Sometimes, the payment can more than double.

And despite the impending surge in mortgage bills amid an uncertain, slow market, the loans' popularity persists. One kind of exotic loan, negative amortization on an option ARM, constituted 35 percent of the mortgages originating in the first nine months of 2006, according to First American LoanPerformance. That compares to just 1 percent in 2003.

The low introductory period of some of these loans ended in 2006, and even more are set to end in 2007. A number of homeowners faced a sizable jump in their monthly payments, reducing the amount of money they could spend on other things.

The popularity of creative financing options worries analysts. Some buyers got into homes even though they could only afford the introductory payment on the loan. When the introductory periods end, those watching the market fear an avalanche of foreclosures from those who can't afford their loans anymore. And for those who shift their budgets to account for the higher payments, the impact to the consumer spending in the region could be significant.

Traditional media outlets weren't the only purveyors of information about the market. Online innovations allowed Average Joes to snoop at their neighbors' home values, post listings and blog about their findings. Some were created this year, while several created in previous years, like Zillow, bounded in popularity.

Dennehy said the phenomenon commoditized the housing market.

"That worked to fuel the boom," he said. "And now it exacerbates the perception of the housing market -- whether that's reduced listings, foreclosures, or whatever."

Many real estate agents consider the websites a threat to the services they provide. But David Cabot, the incoming president of the Realtors' association, said he embraces Zillow and the other sites as good tools that give his clients one more piece of information to compare.

Some Realtors think the new sites will force them and their colleagues to prove to potential clients that they're more than chauffeurs. About 4,000 agents joined the local association in the last five years, and about 200 have been joining every month since January, Jolly said. He and Cabot expect a 20 percent decline in agent count in 2007 as the public starts to expect more services in exchange for commission, and the inexperienced agents are weeded out.

Crystal Ball Gazing
University of San Diego economist Alan Gin said the housing market's impact on the economy, and vice versa, is significant for the county. Gin said he's surprised at how rapid the drop in prices and sales has been already this year. And the end to rampant home appreciation also signals a slowdown for the "wealth effect" -- many homeowners in this recent boom used their homes like ATMs, refinancing their original mortgages to withdraw some of their increased value and spend it on cars or cruises even a second home. This year's decline brought a sobering effect to that phenomenon, and the retail world may feel that drop in consumer spending significantly next year, Gin said.

With the potential for foreclosures or decreased consumer spending from high mortgage payments, job losses in construction and other real estate related fields and a market that may force middle class households to leave the county in order to afford a house, Gin said it's too early to tell what the impact will be for the economy. But it doesn’t look good, he said at a recent USD real estate conference.

It was the first time in seven years of delivering an economic forecast at the conference that Gin didn't expect San Diego to outperform the nation or the state in the next year, he said. He identified slowdowns in the job and housing markets as areas of concern.

Those watching the local real estate market often wince when asked to deliver a forecast. Data can be tracked; motivations cannot, they say. Buyer and seller psychological factors will almost certainly continue to play a role in the market in 2007, and that x-factor blurs whatever crystal ball image they might conjure.

But they gave it a shot.

Robert Brown, a professor at California State University in San Marcos, compiles statistics on the housing market each month. He thinks a drop in prices could spur buyers back into action.

"If, indeed, people are just sort of waiting to see what's going to happen in prices, then, if we do see a decrease in price, that will encourage people to get into the market," he said. "And that [activity] will counter any significant price decreases."

Cabot, the incoming San Diego Association of Realtors president, said he expects prices and sales to pick up by the end of March. Inventory levels may rise in the beginning of the year, he said, but increased sales will absorb those levels quickly.

Colby, of MarketPointe, said in order to absorb the number of homes unsold, the county will see more price drops. He said while some expect sales to turn around next year, he thinks it will take a while longer.

"Sellers are pretty sticky," he said, referring to the reluctance sellers have to lower their prices.

Dennehy, of Sullivan Group, said he expects an up-tick in sales in February or March, with the trend remaining essentially flat for another year or so. Prices will continue to come down until sales and inventory catch up, he said.

"On the whole, we're looking at more 'fingers-crossed' thinking," he said. "Six months ago, it seemed a lot more desperate than it does today."

Rules to Live By

Smart growth not so smart?
- Wendell Cox
Monday, December 11, 2006

To the extent that there's been anything about the economy still worrying some journalists and media analysts in recent months, it has been softness in the housing market. Downward price pressures in new housing were noted in October as having contributed to less-than-expected economic growth. On Nov. 20, the National Association of Realtors issued its third-quarter report showing a 12.7 percent decline in existing home sales when compared to the same period last year.

All of this, of course, will refuel the debate about the "housing bubble." Is there one? If there is, will it burst? Paul Krugman, the economist and columnist for the New York Times, has argued that there is a bubble, but it is a geographical one. His thesis is that the "zoned-zone" is artificially inflating housing costs -- and he appears to be right.

A zoned-zone is an area of the nation that has embraced land-rationing policies, usually under the misleading title of "smart growth." Those policies include restrictions on suburban development, such as Portland's (Oregon) urban growth boundary, and requirements for excessively large lots that reduce the supply of land for residential development.

There is little argument about this dynamic among economists -- rationing raises prices and it does so with a vengeance.

Take "smart growth" friendly San Diego -- where today the median house price is more than 10 times the median household income (a measure called the "median multiple"). The historic norm has been a median multiple of 3.0 or less. In San Diego, the median multiple was 3.6 in 1995. In just 10 years, the total cost (including interest) of the median-priced house in San Diego has risen more than $900,000. By comparison, the total cost over a 30-year period of the median priced house has risen only $55,000 in Atlanta, where there is more liberal land-use regulation. And in just the first half of the decade, 100,000 domestic migrants -- people who move from one metropolitan area to another -- have left the San Diego. Who can blame them?

In the San Francisco-San Jose area, the domestic migration loss over the same period has been nearly 550,000. Total population growth in the San Francisco-San Jose area since 2000 has been less than that of San Joaquin County.

State-level home sales tell a stark story. In the states with stronger smart growth or other land-rationing policies, the fall-off in existing house sales has been by far the greatest. During the past year, existing house sales have fallen an average of 20 percent in the highly regulated states. All 18 of these states experienced declines, even in historically fast-growing states like Arizona, California, Florida, Nevada, Oregon and Washington. By contrast, in the less-regulated states, the annual loss was just 4 percent and one-third of these states, including Georgia and Texas, experienced sales increases.

The escalation of housing prices relative to incomes in the highly regulated markets is not the result of low interest rates. The same low interest rates have not produced the same effect in markets with lighter regulation, such as Dallas-Fort Worth, Houston or Kansas City. Nor is the escalation a result of demand, as Atlanta, Dallas-Fort Worth and Houston are the fastest growing large metropolitan areas in the nation, yet the median house price has remained below the 3.0 benchmark.

The problem in highly regulated markets is that the supply of housing is not allowed to keep up with demand. If housing affordability doesn't improve, it is not inconceivable that it could at some point have serious effects on the overall economy, perhaps even a "smart growth" induced recession.

The economic and social consequences are ominous. The hundreds of thousands of additional dollars that must be paid to own a home in California, Florida, Oregon or other smart-growth states will mean less money for other needs. Fewer consumer products will be purchased. Fewer jobs will be created.

But, worst of all, there will be fewer homeowners. Lower income and many middle-income households will find their way to the mainstream of economic life blocked by artificially high prices resulting from naive urban planning policies. It seems likely these higher prices will lead in the long run to lower rates of homeownership.

The cost of this urban design extravagance will fall most significantly on minority households, whose income is generally lower and whose home ownership rate remains a full one-third below that of white-non-Hispanics. In the long run, "smart growth" is simply bad for the economy and for the people on whose enterprise and wealth creation the economy relies.

Ocean-view Tijuana townhomes attract San Diego buyers

By PAUL WILLIAMS, Mexicana Properties
Thursday, November 16, 2006

A new generation of Mexican homebuilders is developing homes with features and amenities unavailable in the United States at any price. Leveraging the lower land, labor and wholesale material costs, developers are offering buyers priced out of the north-of-the-border market affordable, quality homes in gated, landscaped neighborhoods that more resemble Tierrasanta than Tijuana, and customers are buying.
By perching his Playas Diamante Residential development (www.playasdiamante.com) on the cliffs overlooking Playas de Tijuana ("Beaches of Tijuana"), one builder is banking that his 350 three-bed, 2.5-bath townhomes priced from the mid-$100,000s to low $300,000s are an easy sell. He's right. Shoppers experiencing the sticker-shock of San Diego home prices are finding irresistible the large, high-quality residences that feature unobstructable Pacific Ocean views offered at less than half the price of a single-bedroom Santee condo.
"I'm from Monterrey (Mexico) and absolutely fell in love with these magnificent Pacific Ocean views and the fresh, salt-air breeze," said Joel Gamez Martinez, the developer. "Here in Tijuana, I knew I could build the best of the best yet still keep prices reasonable. But I wanted something really exceptional. With this location, I knew I had found my diamond."
With more than 80 percent of the first phase selling out literally before the Mediterranean White paint dried, it's clear Gamez Martinez was wise to follow his instincts.
For the price, American buyers might expect to find the builder cutting corners, and he did -- in all the right places. By employing modern "eco-intelligent" architecture emphasizing energy and water efficiency, both household and community maintenance costs are cut substantially. Eschewing "sticks and stucco" homebuilding, the structures are built using super-reinforced cinder block walls, totally insulating residents from virtually all exterior noises and temperatures changes (not that the La Jolla-like beach climate pushes the mercury around much). Off-the-grid solar-powered LED lights brightly illuminate walkways, driveways and the lush landscaping that is efficiently nourished using state-of-the-art automated grey water recycling technology. Residents can even separate their plastics, paper and green waste in a recycling program coordinated with a local middle school environmental program.
Not only are Playas Diamante Residential homes "green," they're "smart," too. Homes feature sophisticated alarms and lighting control that are automated or controlled via the owner's cell phone. Connecting the home intercom with the manned 24/7 front gate ensures convenience doesn't lessen the security of living in a gated community. Since all the homes have integrated high-speed cable, owners have the option to upgrade, allowing them to control their home lighting, security, air conditioning and even the window blinds remotely via the Internet.
At least one home shopper seemed impressed. "These are beautiful. The floor plans are smart and roomy. We never thought we could own a home that has a big balcony off the master bedroom with this view of the Pacific Ocean. So, we're really excited," said Adriana Comparan as she walked through a recently finished unit with her husband and their two elementary school-aged kids in tow. Judging by the number of children playing in the neighborhood, it's clear many families didn't pass up the opportunity to have a breathtaking ocean view themselves.
"Now, we're about to offer our best value -- the Diamante 'Crown Jewel' Penthouses. Given the great response, we have every expectation to close escrow on every unit by the end of January," said Gamez Martinez. With the security of U.S. title insurance combined with liberal financing and onsite property management, many investors and prospective homeowners frustrated with San Diego housing prices that have flattened at the top are seeing incomparable buying opportunities in Baja California, and savvy Mexican developers are building more affordable, quality housing to meet this dynamic shift in market demand. One look at Playas Diamante Residential is proof enough that the San Diego housing market now includes the beaches of Tijuana.

County's growth falls to 2.9%

Area drops below state, national figures
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER

November 2, 2006

For the first time in six years, San Diego County's economic growth is lagging the rest of the state and nation, according to a report released yesterday by the Greater San Diego Chamber of Commerce.

San Diego's gross regional product is growing by an estimated 2.9 percent this year, the second-slowest growth rate in the past decade. In comparison, the report said, California has shown 3 percent growth this year and the United States 3.2 percent.

Next year's growth will be even slower, although San Diego will resume its position of outperforming the state and nation, the chamber predicts. The forecast projects that next year the county's economy will grow 2.5 percent, compared with 2.4 percent for California and 2.1 percent nationwide.

“San Diego has really been the harbinger for the state and national economy,” said economist Kelly Cunningham, who prepared the forecast.

“For the early part of this decade, San Diego led the nation in growth and now we are leading the nation in seeing our growth slow down.”

One of the chief culprits for the slowdown is the decline in home construction and growing softness in prices. In San Diego County, median home prices have dropped 4.4 percent since last year, according to the latest figures from DataQuick Information Systems.

Cunningham – who once worked full time for the chamber and now works as a consultant – predicted that prices could decline an additional 5 percent over the next year.

“The biggest declines will come in condominium prices,” he said. “We're really overbuilt in condos. And I'm concerned about the growth of condo conversion.”

Cunningham noted that the weakness in home prices may have led to a cutin consumer spending. After adjusting for inflation, retail sales have been close to flat since the end of 2004, he said. He estimated that the sluggishness will continue through at least mid-2007.

Jon Haveman, co-founder of Beacon Economics, a forecasting and research firm, said, “I hate to be bearish, but I have to be.” With a decline in home prices and a rise in foreclosures, “Consumers are going to start cutting back their spending, and if they cut back too dramatically, it could lead to a recession.”

On the other hand, Haveman said, a good omen for California is that all of the state's regional economies – except for the areas around Santa Rosa and Fresno – are still growing relatively well. And if California businesses increase their spending, they might make up for pullbacks from consumers.

“Corporations are sitting on pretty large war chests right now,” Haveman said.

James Hamilton, economist with the University of California San Diego, said there are signs that housing may be bottoming out. Since July, he said, mortgage rates have dropped by almost half a percentage point, which could be enough to bolster the market.

He noted that it typically takes up to 16 weeks for home prices to reflect changing interest rates, which means that the market could improve soon.

However, there are several factors that could keep prices declining, he said. A spike in loan defaults and foreclosures “could give us a much uglier scenario.” And home buyers might be slow to enter the market, hoping that the longer they wait to buy a house, the cheaper it will get.

“I think it's a little more likely than not that we have reached the bottom (in housing prices),” he said. “But there's still a very significant possibility – maybe 30 or 40 percent – that things could get much more frightening.”