Housing rebound forecast, yet risks lurk

By: DAVE DOWNEY - Staff Writer | Tuesday, May 1, 2007 9:50 PM PDT ∞

SAN DIEGO -- San Diego County's housing market will continue to be flat for at least another year, and it could get worse before it gets better if spiking foreclosures dump a large number of properties on the market, an UCLA economist said Tuesday.

In the middle of 2008, however, the market is expected to rebound, said economist Ryan Ratcliff, who specializes in regional forecasts for the closely followed UCLA Anderson Forecast.

"I think you'll start seeing light at the end of the tunnel next year," Ratcliff said.

Ratcliff made the remarks while delivering the UCLA economic team's second annual forecast for San Diego County to a crowd of 350 real estate and construction industry professionals at a downtown San Diego hotel.

In a report released with the address, Ratcliff predicted that new home construction will decline more, sales of all types of houses will continue to be weak and home values will stay flat or decline slightly across the county, as tightened lending rules keep first-time buyers out of the market.

But while Ratcliff sees light ahead, he cautioned that the future is murky because of a troubling development that has the potential to ripple through the market and the region's strong and diverse, but slowing, economy.

"The bad news is that a new source of weakness has started to emerge: Default and foreclosure rates in San Diego are nearing levels not seen since the darkest days of the 1990s," Ratcliff wrote in the report.

During the first three months of the year, the foreclosure rate reached 10 for every 10,000 households in the county -- a small fraction indeed, but one that matches the highest level recorded in 1997, at the end of last decade's extended recession, the report showed.

Meanwhile, notices that people were behind on mortgages went out to nearly 40 families for every 10,000 households in the first quarter of this year, compared wtih 50 per 10,000 households at the depths of the recession in early 1996.

The rising foreclosure rates have stoked fears that home values could tumble.

"Does '90s-level foreclosures mean '90s-style depreciation?" Ratcliff asked the crowd. "So far the answer is no. But it's too early to tell."

Ratcliff said that, because the regional economy is stronger today than it was in the 1990s, many who are in trouble will find a way to refinance loans or make up late payments because they are still employed. By contrast, the recession in the 1990s was characterized by the worst job losses ever seen in Southern California.

Ratcliff said economists should know by summer whether or not a "tidal wave of foreclosure sales" is going to trigger a price collapse. That, he said, is when many of the adjustable loans home buyers took out during the height of the housing boom will reset to higher interest rates and hence monthly payments.

Orange County real estate analyst John Burns, who delivered a companion address to the crowd, said 70 percent of homes bought in San Diego County in the last two years had adjustable mortgages.

During the boom, Ratcliff said, lenders told buyers they needn't worry about resetting loans because they could plan to refinance before the first payment adjustment.

"That sure works in a market where homes are appreciating by 10 percent or more a year," Ratcliff said. "But it doesn't work in a market where prices start to flatten out."

According to the report, the median price for houses and condominiums countywide reached a peak of $513,915 in the first quarter of 2006 and declined 5 percent to $485,789 in the first quarter of 2007. The forecast predicts the median will continue to decline, bottoming out at $478,000 in the second quarter of 2008.

The median is the midpoint of the market, meaning half of homes sold for more and half sold for less.

In March, the median price for all homes in North County was $565,000, according to the latest HomeDex report of the North San Diego Association of Realtors.

Meanwhile, total sales countywide are projected to decline from 10,796 during the first quarter of this year to a low of 9,200 in the fourth quarter. In 2008, sales will gradually rise back to 10,800 by the end of the year, the forecast said.

Ratcliff said lenders' moves to tighten rules for issuing loans will continue to have a chilling effect on the housing market.

"The credit crunch is going to take a bite out of first-time buyers and keep home sales weak," Ratcliff said.

The weak housing market is having a profound effect on the regional economy.

For example, the number of construction jobs fell 9,000 from the June 2006 peak to 86,600 during the first three months of this year, the report stated.

The slowdown in construction rippled into the retail sector, which lost 2,600 jobs between the first quarter of 2006 and the first quarter of 2007.

Still, the county added 17,800 nonfarm jobs last year, largely on the strength of the leisure/hospitality and health care industries, which combined for half the increase, the report showed. That compared to a net total of 21,500 new jobs in 2005.

Ratcliff said the recent spike in foreclosures is different from previous ones because it comes during a strong economy.

In the past, sharp upticks were signs of distress and job losses. Today, economists and real estate officials say, the increase is the result of families stretching more than ever to purchase homes that under traditional guidelines would be considered out of their reach.

Prices are out of reach for a number of reasons.

Burns, the industry analyst, said it all started in 2001 when the Federal Reserve sought to head off an approaching recession by slashing interest rates to historical lows. That made homes more affordable to a wide range of people, who began buying in droves, he said. As home prices began to rise, profit-hungry investors started aggressively buying properties. And prices shot through the roof.

Had that chain of events not occurred, Burns said, the county median would be between $380,000 and $400,000 today.

But don't look for a return to that level. Burns said prices likely will decline, but only modestly.

"Those who say the prices are going to go down 50 percent are just yahoos who are not looking at the whole picture," he said.

-- Contact staff writer Dave Downey at (760) 740-5442 or ddowney@nctimes.com.

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Pre-Registration Comments[-]Go to Top

Thewholepicture wrote on May 1, 2007 11:39 PM:Then what is the whole picture? The picture I see is an economy generating $12/hour jobs working for hotels, amusement parks, and retail outlets. Meanwhile, the criminal lending practices that inflated this housing price bubble are being stopped, as they should. Now tell me, how many buyers are there who can qualify for $500,000 starter homes? Ten years ago one would need an income above $150,000 plus $100,000 down. The inventory of homes is above 16000 in San Diego and growing. The number of qualified buyers is dwindling. That's the the picture I see.

Home Owner wrote on May 2, 2007 5:08 AM:To TheWholePicture, you are right in many ways but I believe it is the fault of the Real Estate Agents. They make 6% on the sales and are not held responsible for the outcome of their lying to the buyer to get them into loans that do not make any sense for them. Many are guaranteed to loss in the long run. Now many of those same agents have gone back to selling used cars until the market turns around again! They HAVE to be held responsible in the future to prevent the poor unsuspecting buyer from losing everything he or she owns!

Vista Resident wrote on May 2, 2007 9:44 AM:To Home owner...Why would the guy who sold you the house be responsible for a lender that gave you the financing for your home? That makes no sense and the agent doesnt make 6% he would have to split that with the other agent on the deal as well as each agent has to split it with their brokers and the seller is the one who pays it from his proceeds not the buyer. In the state of California commission is also negotiable. Most homes are now being listed with only a 5% commission and there are many discount realtors that will sell your home for only 1% and sometimes even less than that. For you to blame your agent for something that your lender did is a bit misguided and unfair.

Home Owner to Vista wrote on May 2, 2007 11:58 AM:Fortunately, I am smart enough not to let anyone get me into a no interest or adjustable rate mortgage just so I could get into my house. BUT, I do know several people that have been talked into those loans by the agent BECAUSE they could qualify. THEN a year or 2 down the road, the adjustments happen and all of a sudden the payments are out of reach! Yes, I believe it SHOULD be the agents responsibility along with his broker to ensure that people are not hooked into a situation that they can't handle! That is called ethics, morality and truth. Things this country use to have all of the time. Now it is about the mighty buck and getting all you can no matter what!

David wrote on May 2, 2007 12:13 PM:It time to move to a cheaper area of the country where your children have a better chance of affording a starter home!

I agree with David wrote on May 2, 2007 2:31 PM:For those suffering, trying to pay off loans beyond their income, sell the house, even if taking a loss. Grab your precious possessions and head to beautiful Kentucky or North Carolina (should you wish a pretty ocean with warm water). Well-constructed brick homes with oak and weeping willow trees (not sticky palms) can be had for $100K. Yes, you read that right. You won't need to be a CEO to afford a home there! The big bonus is few Hispanics and schools are the center of the community! That means the next generation is prepared and upstanding. People really CARE bout each other, not just for 'show' but for real heart care. The seasons are wonderful, jobs ARE plentiful, nearly everyone speaks English (but other languages taught in school too), and best of all, you can save for retirement and leave a legacy for your children too. Here, you are going backwards The faster you run (or slower the freeway gets) the more behind you get here. What would you miss? the beach that stinks and you don't have time to relax on? The sunshine when you are toiling inside a windowless building 10 hours a day? Nearly $4 for a gallon of gas, the highest electric rates in the country, the health care..what? If you've lived here all your life, you haven't a clue about the wonderful world beyond California.

To I agree with David and David wrote on May 2, 2007 4:35 PM:Beleive it or not, there are many people who don't think people like you exist. They are the fortunate people who were able to purchase homes before the astronomical rise in prices during the past six years put homes out of reach for our average population. They didn't have to do it using dangerous loans, they were able to get 5% conventional fixed rate loans on $200,000 homes. And you know what? They couldn't care less that others can't afford a home unless they purchase one with one of these disasterous loans. They couldn't care less that our kids won't be able to afford a house. It's the me generation and they got their's. The big mistake is that they actually think they somehow "earned" what they got by working harder, being more responsible, being smarter, etc. But what they got is lucky. They were in the right position at the right time. The jobs they have aren't any higher paying than the people wanting to buy a house today or who bought using one of the loans that is causing all the grief today. But, politically speaking, their voices are the only ones being heard. They fight against any housing that might cost less than their house because it might bring in "those people". But in the long run, they will get theirs. When all these boomers are old and looking for a strong economy to help keep the standard of living high, they will be dependant on the taxes being paid by the young people, but the young people won't be here. They will have chased too many of them away because, back in the day, they didn't care. Mark my words, it's a scary demographic shift that is being caused and will be caused by the short-sighted, selfish people who "have theirs". I love So Cal but North Carolina is sounding better and better. Good luck everyone.

who wrote on May 2, 2007 7:53 PM:Why do people keep saying houses are unaffordable? Someone is buying those houses. If you say they can only be bought with exotic loans, well then good! Let those people who foolishly used exotic loans and drove the prices through the roof to die on the vine and sell for a loss! Yes for a loss. Sound bad or mean? The flip side is then someone less foolish can purchase that house for a lower price. Is that what you were whining about?

Floyd wrote on May 2, 2007 9:09 PM:Somebody earning $15 per hour (that's $31,200 per year and twice the minimum wage) can afford to buy a home priced no higher than $93,600. A family earning the median income of $45,000 per year can afford a home priced at $135,000. A husband and wife who both earn $15 per hour can afford a home up to $187,200. It's no wonder that homes commanding $600,000 a year ago are now being offered for $450,000 -- with no takers!

SoCal and proud wrote on May 2, 2007 10:34 PM:"The big bonus is few Hispanics and schools are the center of the community! That means the next generation is prepared and upstanding. People really CARE bout each other, not just for 'show' but for real heart care. The seasons are wonderful, jobs ARE plentiful, nearly everyone speaks English (but other languages taught in school too), and best of all, you can save for retirement and leave a legacy for your children too." I can already feel the love. Mmmm, good.

lookoutbelow wrote on May 3, 2007 6:36 AM:This kind of happy talk is just "whistling in the graveyard"....There are are no financial fundamentals being followed here, this is an orgy of greed and stupidity... just like my little kids used to say, "Daddy, I dont want to leave Disneyland"...Well, sorry....reality is going to teach most of these homeowner fools a harsh lesson...Even Disneyland has to close sometime..its not reality..... Hahahaaaa I just sit back and laugh at their naivety and delusional Peter Pan beliefs I will buy their dream homes for 30 cents on the dollar eventually

Moral Hazard wrote on May 3, 2007 8:42 AM:Look at the sponsors of the Anderson Forcast and you'll realize who its written for. Like they say, he who pays the piper calls the tune. In what universe does a 5+ year credit binge correct in 2 years? For every party, their follws the inevitable hang-over, and this party was the biggest blow-out ever. What is this guy talking about "If" foreclosures spike up? They already HAVE, they've exceeded the "darkest days" of the mid 90's correction and are still growing. Its only the notices of defaut that are approaching, and this tells you that these NODs are converting to foreclosures at a higher rate than ever. This is likely due to the "owners" having little to no skin in the game and possibly being "investments" as opposed to owner occupied. For Burns, if we're all Yahoo's, you're a paid shill.

Andy wrote on May 3, 2007 10:14 AM:People who write articles such as this may understand, but choose to ignore the economic fundamentals. They are paid off to tell the masses that they "better buy now; prices have nowhere to go but up." Unfortunately, many people think that since their friends may have seen big appreciation in the last few years, that housing can't possibly go down. Well, it has in the past and it is again. We are just experiencing the tip of the iceberg now - it'll get much, much worse. Yeah, there are other states in the US, believe it or not - many are really nice too. Problem is that many of us only know life in Cali and cannot imagine life anywhere else. Go travel and see some of these other states with cheaper housing. You will be pleasantly surprised; at least, I sure was.

TO "To I agree with David and David " wrote on May 3, 2007 10:17 AM:The people you speak of are few and far between. Congrats if you are one of them but I venture to say that most fell victim to the same thinking expressed in this article, and that is housing always goes up. In the long run yes, but define long run. Let's say 30 years. Within those 30 years though, things can get ugly particularly with unprecented inflation in prices like that last 5 years saw. Those people who could care less, OUGHT to care more, because of government bail out talks. Though I venture to say those you speak of probably want that because they saw rising values and took equity out of the ATM-Home.

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