Wednesday, June 20th, 2007 at 12:07 PM
FENG Panel Discussion
The Financial Executives Networking Group had a panel discussion last night with an esteemed group of experts, plus me. Alan Nevin, Gary London, and Rich Toscano provided some great insight to the real estate market, from their unique perspectives. Some of the highlights:
Gary pointed out that historically San Diego has enjoyed consistent population growth, with 50,000 people per year coming to the county. The suburban sprawl has maxed out – there isn’t much land left to be developed on the outskirts. As a result, future growth would have to be upward, he called it "Manhattan-ization". The downtown condo scene was evidence of that, and even though the explosion of condo developments has saturated the area, the demand has been steady. Alan mentioned that almost all of the buildings have had enough sales to cover their construction loans, and there won’t be a bunch of forced sales of new condos by builders.
There are a few sites on the drawing board for future condo projects, buy Gary surmissed that they won’t get built until lenders are very comfortable with the environment. The costs of construction have already gone up $150-$200 per square foot, and future buyers of new condos will have to absorb that to make the project viable. It also means that current owners can look forward to higher comps as a result, once those projects get built someday.
Condo conversions were discussed too – Gary said that even though the City of San Diego is now trying to pass a limitation of 1,000 units per year, there aren’t any Class A condos left to convert. In the last couple of years only 2% of the tenants purchased their apartment, while in the early-1980s it was as high as 75%. The difference this time is that the gap between rents and mortgage payments are substantial, and those buying are owner-occupants from outside the property.
The most interesting stat of the night was that two-thirds of the households in San Diego County don’t have any occupants under 18 years old. The resulting discretionary income was noteworthy - people have more money to put towards house payments or retirement.
The Generation X crowd is smaller than the baby boomers, but the Gen-Y group is big – there are 82 million kids in America that need a place to live. It was expected that satisfying their housing needs will be a struggle, especially if affordability doesn’t improve. But it would seem that it would help create steady housing demand of some sort. The immigrants are a force too, Gary called it the "International-ization" of San Diego. Alan mentioned that in his neighborhood buyers have come to escape Mexico City, afraid of kidnapping. They have bought houses around him at whatever price it took to get one. Plus, with the currency exchange rate being very favorable, the trend of immigrants coming here and buying homes seems to be one that will continue to fuel demand.
I had dinner with Rich and his wife afterwards, and we went on for another two hours. Rich’s analyses are spot-on, especially regarding the likelihood of the exotic financing come home to roost over the next year or two. Could it be possible that there will be enough demand to keep it all afloat?
Here’s how we’re doing so far – this chart is measuring the last sixty days, the hottest time of year for sales, with the percentage of change between 2004 and 2007:
Closed Sales, April 15 – June 15 2004 2006 2007 % chg
Carmel Valley 120 91 96 -20%
Encinitas 104 70 72 -31%
Carlsbad 224 187 224 0
Oceanside 366 279 190 -48%
I triple-checked the Carlsbad number, and it was identical for both years. At least with the Carmel Valley and Encinitas sales higher than last year indicates that buyers are willing to buy – if the sellers can get their price right. Oceanside and other low-end areas are suffering.
Median Sales Price/Average SF 2004 2006 2007 %chg
Carmel Valley $315 $348 $332 +5%
Encinitas $314 $318 $338 +7%
Carlsbad $300 $311 $295 -2%
Oceanside (92057) $259 $285 $261 +1%
I made a point about how critical the buyer’s psychology is to the future – as long as buyers believe it’s a tough market, they will either stay on the sidelines or expect a deal. The cascade of foreclosures is likely to convince buyers that better deals are coming – as long as the banks are willing to give them away. Will the foreclosures trickle up into the superior properties? Rich and I agreed that was a great indicator to watch.
Kelly Bennett from the www.voiceofsandiego.org was there, here’s a link to her article:
http://www.voiceofsandiego.org/articles/2007/06/20/survival/748econ061907.txt
Posted on Wednesday, June 20th, 2007 at 12:07 PM in Thinking of Buying?, Thinking of Selling? | 24 Comments » | 
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jim, thanks for the summary. are we going to get to see a video broadcast of the event?
ocrenter | June 20th, 2007 at 5:22 pmUgh.. So much spin… Must resist temptation to argue all of Gary’s comments.
shadash | June 20th, 2007 at 6:01 pmI’ll second shadash’s comment. It would take me too much time I don’t have to combat Gary-ization and his spin.
PoorHouse | June 20th, 2007 at 6:27 pmdon’t trust anyone with the name Gary…
ocrenter | June 20th, 2007 at 7:04 pmThanks for the summary, Jim. I look forward to the V of SD article.
jg | June 20th, 2007 at 7:44 pmJim,
Your drinking too much of your own coolaid to think that price will stay where they are now. You are begining to loose your credibility with some people on a lot of your arguments/rational regarding prices not reverting to the historical mean. Question, what is the percentage of homes coming on the market that are bank owned/forclosures. In some places is 1 out of 3 or 1 out of 4 homes coming on the market are bank owned/forclosures. Prices will revert to the mean, they always have, they always will.
me | June 20th, 2007 at 8:21 pm"Gary pointed out that historically San Diego has enjoyed consistent population growth, with 50,000 people per year coming to the county."
This isn’t true, actually.
Population Growth 2000-2006
+56430
+57315
+45664
+36099
+26347
+26608
(Source: http://www.dof.ca.gov/HTML/FS_DATA/STAT-ABS/2006_statisticalabstract.pdf
As you can see the rate of increase has been declining since 2001. I suspect this trend will continue do to the poor business climate, declining quality of life and housing afford ability problems here – but let’s discuss… Predicting the future trend is, of course, conjecture.
Bear | June 20th, 2007 at 8:43 pmme,
I say in this very post that buyers either expect a deal, or they’re not buying. Sounds like a downward trend to me.
The statistics don’t show the individual dynamics of each sale – even though the stats listed above look pretty decent, each sale probably had to be a better deal than the last one near it, to get the buyer off the fence.
Let me get this straight though, as long as I agree with you, then I have credibility – is that right?
I’ve never said that prices aren’t going to revert to the mean. I just report what I see each day. But I’ll tell you what I told Rich last night, when he said that he thought prices would have to go down 30% to make sense again to investors. The owner-occupants are going to jump in before the investors do, and when he asked me at what point that was, I said 10% higher. Conclusion – we have 20% to go.
If you agree, it doesn’t really matter when you get the 20% off. What matters more (I think) is that you find the perfect house for you, and that includes the perfect price.
If you agree.
If you’re a wait-and-seer, no problem.
Jim the Realtor | June 20th, 2007 at 9:13 pmoc,
We cancelled the video when one of the participants objected. Rich and I agreed to shoot our own videos though.
Jim the Realtor | June 20th, 2007 at 9:29 pmSecond Shadash’s post.
Trying desperately to bite toungue & not jump into the sandbox again.
CA renter | June 20th, 2007 at 9:31 pmIn lieu of having a rational argument about fair housing prices, let’s just resort to trading stupid insults.
Gary’s mother is a hamster and his father smells of elderberries …
greenlander | June 20th, 2007 at 9:57 pmWhich participant objected to the video ?
Guess they didn’t want their spin on tape to be thrown back in their face later.
They know they are lying at this point.
UncleGit | June 20th, 2007 at 10:37 pmawwww… is someone shy?
we’re doing too good of a job calling people out when they make wild predictions they can’t back up later.
this "50,000 population growth" each year thing is such bull. maybe if prices drop back down to earth that’ll happen, but not if the prices stay where they are.
ocrenter | June 20th, 2007 at 11:59 pmI realize that most buyers, including myself, want the home prices to tank (I sold my home recently) but the reality is that the home prices in many neighbors, including the area of interest for me, Manhattan Beach, continue to increase while inventory levels are returning to 2005/2004 levels.
Anyone can say that home prices must return to historical norms but the reality is that prices in many of the desirable areas are not falling. Will we eventually return to historical norms?…likely…will this happen in a year or two?…unlikely. I’ve read many bloggers who compare our market to the Japanese housing bull market of 1980-1990 and take the position that our market will fall 50% just like the Japanese market. If our market follows the Japanese model, than the nominal value of many US markets will fall less than 5%. Japanese market has declined 50% but this took 16years of "real" value declines. In terms of nominal value, prices in Japan has barely fallen.
In addition, the "desirable" neighborhoods in Japan maintained its healthy premium pricing. In fact the gap between the "desirable" and "less desirable" has widened to a level far greater than during the peak of their "housing bubble."
To the extent that our market has some resemblance to the Japanese "housing bubble" model, would most people wait 16 years for inflation to erode real housing price and wage increases to occur so that traditional income-mortgage ratios can once again be observed? I’m sure some will wait…and take out a 30 yr mortgage when they are 60+ years old..that’s real smart.
I know many who decided not to buy since 2002 because they thought homes were overvalued. They really believed the bubble blogs, shiller, UCLA Forecast who kept espousing that home prices will fall in 2003, 2004, 2005, 2006, 2007…have prices fallen yet? Not in my neighborhood. Each year when their prediction proven wrong, the bubbble sitters have ton of excuses why the market hasn’t crashed yet…but it will in 6mos, next year…right?
Bottome line, no one really knows what will happen to this market.
………………………..
Me:
Just because Jim states his observation backed by empirical data which seems to indicate that the market seems ‘slightly" bullish recently, that is no basis to attack his credibility. You can attack the numbers IF you can prove the numbers are wrong, but it is disingenious to attack Jim’s credibility because you are frustrated with the housing prices charging up again. Why don’t you gather your own data on Carlsbad, La Jolla, Malibu, Manhattan Beach, Beverly Hills, Pacific Palisades or some of the other pricier neighborhoods and see whether the prices are falling…in these neighborhoods, the prices are up, inventory is down and the market is on FIRE.
southswell | June 21st, 2007 at 1:52 amSouthswell,
Look at Jim’s data again. Carlsbad is -2% from its 2004 prices. Oceanside is up 1% from 2004, so that goes against the point you are trying to make.
I have thought prices have been too high across the country since late 2003. I believe the only factor that kept the prices going up was the low interest rates and exotic loans given to people that should have never qualified for a loan. This has been my view since 2003, it has not changed. I feel that prices would have started going down a few years ago if interest rates would have gone up as the Fed started their increases, instead they were held down to keep the money coming in for the banks/lenders and Wall Street.
The reason’s that were given by people saying there was not a bubble have all been proven wrong. Low foreclosures, very few speculative buyers, very few second home buyers, no problems with the exotic loans, prices have never dropped nationally and so on. The new trend I am noticing is, well things are going down in the lower priced “bad” areas, but higher priced/better areas are not going down because everyone that lives there is made of money.
Frankly the people I know that have real money, are the “cheapest” people I know. I don’t think they are rushing out to overpay for homes because they have nothing better to do with their money. This thinking may comfort those that are worried about losing money on their high priced home, or losing the home itself when they can’t tap the equity to keep making the payments, but I just don’t agree with that line of thinking.
SMC | June 21st, 2007 at 2:46 am"The Generation X crowd is smaller than the baby boomers, but the Gen-Y group is big – there are 82 million kids in America that need a place to live."
I call BS on this one. It turns out that the birth rate post boomers (i.e. 1965 and later) is dead-flat. I’ll try to dig up the census data, but if you look at it over time, you can see a hump that represents the boomers moving to higher ages with time, followed by a flat-to-slightly declining tail.
Minor point, but absolutely true. Often they claim Y is bigger than X, but if you look at it, they’ll have something like 13 years for the X genereration and 18 for the Y (an example from the Denver Post, IIRC).
incessant_din | June 21st, 2007 at 3:54 amThe Gen Y quote didn’t come from me.
A question was asked; "when did we start to monetize our housing?" and a guy in the audience responded, ’1977′.
That was the first time I heard that year, but his explanation was revealing. He bought a house in 1977 and by 1980 it had doubled in price. Not value, mind you, but price.
Another guy came up to me after the event was over and told me his story how he bought a house in 1977 with $4,000 down. He parlayed that into the house he lives in now, worth $800,000. He made sure to say he hasn’t contributed another penny out of pocket when buying – he has only used previously-built equity and rolled it up into a handful of other houses.
Real estate has had a couple of bumps, but for the most part it’s been great for 30+ years.
Now for Gen X&Y – will it be different?
We have heard since we’ve been breathing that it’s good to buy a house, and real estate always goes up. It is part of our fabric, and the supporting evidence is powerful.
But Gen X and Y may not hear the same song. In fact, it could be dramatically different. They will at least experience how unaffordable it is, that’s a given. They’re probably going to hear over the next few years that real estate goes down.
Without the constant "din" of up, up ,up, could it change a core component that drives demand? Would you have bought a house if your family and friends weren’t constantly prodding you to do so?
Gen Y especially – these kids have to have a negative impression about buying a house, unless they are trust-funders. It has to look like the impossible dream to an 18 year old – if nothing else, it’ll certainly add more people to the sidelines.
Jim the Realtor | June 21st, 2007 at 4:27 amJim,
Didn’t mean to make it soun like an attack on you. Sometimes I’m just too crotchety at my ripe old age of 31. I like good data, and I hate bad data. There are times when I think that if everybody (or just enough) people believe something and act on it, then it might as well be true. A good friend (who happens to live in San Diego) eventually convinced me that it does make a difference. That’s why I try to contribute to discussions when I have something pertinent. I think the readership (and writers) here are trying to understand the truth.
Realizing that our demographics are more similar to Japan in 1990 than we have been led to believe is important, IMHO. You think SD is built-out? Take a look across the sea. If the banks are forced to delay BK and re-work loans into some kind of indentured servitude time frame, then we are doing EXACTLY what Japan has. BTW, our currency may be falling, but not against the Yen. Looks like a 50% to 60% decline in nominal prices over 10 years is in the cards. Too bad, I would have been happy with 40% in 5 years.
incessant_din | June 21st, 2007 at 4:44 amAll markets are unpredictable and the RE market is no different. We should use history as a guide and it tells us that a tough downturn is likely in the RE market. But for buying a house to live in, everyone is different. For some, if they can afford it on a fixed 15 yr or 30 yr loan and don’t mind risking a loss in value, then buy when they find the right home. For others, the prices will need to come down a good amount before it will work for them. As an investment, I would definitely not buy now.
As for the better areas, they will get hit hard too but probably not until there is a recession . They got hit last time in the 70′s, 80′s, and 90′s and will get hit again.
Keep up the good work Jim.
norcalray | June 21st, 2007 at 5:58 am"PARSIPPANY, N.J., April 20, 2006 – The CENTURY 21® Homebuyer Survey released today reveals that baby boomers were driven to purchase their first home based on family reasons while Generation X and Y buyers are more likely to buy or have bought a home as a "safe investment."
AND
"The average age for first-time homebuyers was 26 among Generation Y respondents, which is three years younger than Generation X (29) and baby boomer (29) survey participants."
http://www.century21.com/learn/content.aspx?refStr=pr04212006
===================================
1. If RE is no longer considered a "good investment" are these Gen Yers going to continue buying houses?
2. I think most Gen Xers are already in. We’re Gen X and I can’t think of a single person/family who doesn’t own a house (other than a couple who will not likely buy due to necessary flexible work locations, etc. & a general desire to remain flexible). Everyone who wanted to buy certainly could have "qualified" these past few years.
=====================================
BTW, I’m one of the bears who said home prices were too high in 2001 and still stand by that statement. We will have to see where the bottom lies before we know who will eventually be proven right or wrong. If prices drop below 2001 levels (inflation adjusted), then the long-time bears were right. Time will be our judge.
CA renter | June 21st, 2007 at 6:38 amincessant din, no attack taken. I’m with you on the data – too much focus on data, good or bad, can obscure other important factors that are contributing to homeownership decisions.
The Japan example seems to have relevance to what’s happening here – especially the long, drawn-out effect. Every time I tell people I think this could go on for 5-10 years, sellers want to argue – they thinking 12-18 months and we’ll be right back at it.
There could be a renewed "perkiness" come 2009 with a new president, but that doesn’t mean your going to sell your house for more than today’s price. It’ll mean you might be able to find a buyer for your house that will pay their price for it, not yours.
Keep contributing here no matter what you have to say, we’ll keep it above the "din" (love the handle).
Jim the Realtor | June 21st, 2007 at 6:51 amI’m a gen X and my wife is a gen Y. Works out pretty well for me.
Our friends range through both groups. When I step back and look at it many of my X friends have bought in but at crazy prices. Many of the Y friends are trying to get in but aren’t in a hurry to overpay.
Personally my degree is Economics so I just couldn’t get myself to buy into all the crazyness going on in Real Estate for the last 5-6 years. It’s amazing, I never thought my degree was worth anything. Turns out it might have saved me from bankruptcy. By allowing me to step back and say "Wait a minute this doesn’t make sense. I’ve actually studied about stuff like this before".
Weird how life works out.
shadash | June 21st, 2007 at 1:28 pmThe Gary comments are pretty comical. Hasn’t it been reported that San Diego has seen net migration? I have visited several downtown condos, the ones nearing completion are at about 50% sold, the builder needs to pay HOA after the first close until they all sell, wouldn’t this cause a fire sale? Is it not possible for construction prices to fall? Can someone confirm that concrete, lumber, wallboard, and granite prices have fallen since the slowdown.
downtownrenter | June 21st, 2007 at 4:44 pmI keep seeing people post about how sales are down, but yet price per sqft is remaining high and prices are stable. So, I want to know where this is being seen? In Carmel Valley, the area I watch, there are price reductions on over 50% of the listings. This is considered an area that is stable, family oriented and has good schools. If I can see the price reductions in this area, you would HAVE to assume other areas are worse. Secondly, don’t be naive to mortgage fraud. Its everywhere. For some folks, taking the bad credit for 7 years is worth the cash kickback. Mortgage fraud is rampant and hiding the steep delines thus far. Its coming though as these scammers will eventually weed out. Once they do weed out, we’ll start to see the real statistics on price per sqft, etc, etc.
PoorHouse | June 21st, 2007 at 7:38 pm