17,000 people walk by our office each week. Even a small percentage of this group is a pretty big number. I know this by the amount of time it takes replying to folks who pop their heads in the door, asking “is it bottom yet?”
The answer is always confident, but it varies depending upon the pricing tier, the geography, and the amount of money to be borrowed.
There are definitely areas that I would defend as rock bottom, whose listing prices are trading below intrinsic value. These are the hard hit areas like inland Carlsbad, lower-end San Elijo Hills, Vista, Clairemont, Linda Vista, Spring Valley, El Cajon, and too many others. This is not wishful thinking, but backed up my Market Bottom Triangulation test.
The high-end market of $2m+ seems to stave off a pricing correction and frankly your own guess about its sustainability is as good as mine.
This leaves a big, gaping hole in the North County market… namely, the predominantly coastal “upper middle class” pricing tier. I would love to buy into the statistics that pending home sales rose by 7% (but they’re heavily weighted on the low-end side of the market), and year-over-year sales for the past two years are relatively flat in areas like Carlsbad, Leucadia, Encinitas, Cardiff, and Solana Beach (but this suggests to me that the other shoe has yet to drop).
Yeah, I am unpopular… yeah, I know these areas are special… yeah, everyone wants to live here. But this is what everyone said about San Diego in general two years ago. That we needed to catch up to LA… that we finally have a critical mass… that people will always pay a premium to live here.
All too painful recent events have proven that these arguments amount to little more than wishful thinking, and they do not address the minor detail about people willing to pay a premium… so long as they have the money to pay it.
I would so love to be wrong here, and I am not enjoying the process of selling low-end houses to investors like commodities. But this is where the value is right now. In fact, I can not see a way for prices in the $750k to $1.75m range NOT to come down… a lot.
This is not based on conjecture, but probability. And a “prime debacle”, would really hurt. Small business, the backbone of our economy, is run by “prime” consumers, who when losing their homes, would be hard pressed to stimulate the economy with jobs that many “subprime” folks who already lost their homes are counting on to pay their rents.
Our challenge can be summed up in five words… five year fixed rate loans. Contrary to popular opinion, the sub-prime debacle did not have its roots in socio-economic demographics. Far more cold and brutal than an unspoken class distinction… is simple math. When the two-year rate locks expired, and the new adjustable rate on the monthly payment increased even just slightly, the marginal folks who could not afford it looked to refinance. Nearly all of these consumers found they could not refinance because the lenders have tightened their guidelines. The other 10% had to pay more than they did last time.
Umm… the guidlines haven’t loosened up since then. And, its actually tighter for higher loan amounts. By definition, none of the five-year loans that were written in the last five years have begun to re-set yet. When they do, homeowners will look to refinance. When homeowners can’t refi, they will look to sell. Then they will look to sell at a loss. And once their credit is shot, they will have no incentive to stay in the home.
I referenced this situation as a challenge, as opposed to a problem, because lenders can still stem our collective losses. The rallying cry should be for lenders to extend loan modification solutions before the consumer falls into arrears.