Mike Freeman Petra Robinson has reduced the asking price for her Carlsbad home three times since she put it on the market in May. She had four offers fall through. Two weeks ago, her open house went without a single potential buyer stopping by. Now she's thinking of taking her house off the market for a while. "It's just a very bizarre situation," she said. "I never thought it would take three months or almost four now" to sell her house. It's quite a difference from this spring. Then, local home sellers typically received multiple offers within days of listing their homes, often getting bids above the asking price. Today, the inventory of homes for sale in San Diego County is at its highest level in six years. Instead of getting a flurry of offers, sellers are often finding buyers reluctant to commit. Some sellers are having to cut their prices. Robinson is now listing her house for $615,000. When she put it up for sale, she was asking about $700,000. A similar house down the street sold for $738,000 about that time. "My house right now is like the best value in Carlsbad," she said. This summer's slowdown could signal a turning point for the region's housing market, a time when it becomes clear whether there's a bubble and home values drop, or whether the market levels off following its frantic rise in appreciation. While economists disagree over the existence of such a housing bubble, many worry that home prices in certain parts of the country, such as Southern California, have risen so high that they're out of balance with underlying economic fundamentals. "A lot of people say there is no housing bubble, and I sort of share that view," said Keitaro Matsuda, senior economist at Union Bank of California. "But there are markets that are more overheated than others. If I had to pick, San Diego would be one where some sort of correction is likely to happen." Just how such a correction might occur would be crucial to the local economy, which has thousands of jobs in construction, real estate and home finance linked to the housing market. Matsuda and most other economists don't foresee the local housing market imploding like the Nasdaq stock market of the late 1990s. Instead, they predict a slow deflating in which prices flatten until economic fundamentals, such as household incomes, catch up with the recent rapid price gains. "It probably won't warrant double-digit price increases going forward," Matsuda said. "It will probably do better than inflation, so it will still be a pretty good investment. But it will not be something people can count on for their retirement or whatever." Without a doubt, the local housing market has softened in the past several months. In July, sales of existing homes listed on the Multiple Listing Service dipped nearly 14 percent from the same month last year, according to the San Diego Association of Realtors. "In the last 30 days I've spoken to many brokers, and they all spoke of a slowdown," said Alan Nevin, an economist with the local real estate research firm MarketPointe Realty Advisors. "You can just feel it in the air." Real estate agents say the current softening is simply the market returning to normal after a frenzy earlier in the year, when buyers rushed to purchase before an expected increase in interest rates. That crush caused the median home price in San Diego to rise at a rate of $247 a day over the past 12 months, according to DataQuick Information Services. "Yes, it's taking longer than 30 seconds to sell a home," said Jill Morrow, president of Coldwell Banker residential brokers in San Diego. "There's nothing wrong with that." The softening began in earnest in June and has continued through the summer. As of Thursday, 9,624 homes were listed for sale in San Diego County, according to Sandicor, the local Multiple Listing Service. That's a 75 percent increase from the same time last year. 'Pretty good feedback' In June, Marlane Gray put the 1,300-square-foot Clairemont house that she's owned since 1978 on the market. Looking to retire in Cathedral City, she set a price of $650,000. "I had pretty good feedback from the Realtor I hired, who said you're not going to have any trouble selling this at all," said Gray, who turns 56 this month. "It's beautiful. It shows great." Two weeks after listing the house, which overlooks a canyon, Gray had a buyer. But the deal fell through. Since then, she hasn't gotten any offers, even though she's held several open houses and dropped the price to $575,000-$595,000. "There are people saying, 'If this was just $50,000 less.' . . . They are waiting for bargains," she said. More sales are falling through these days because buyers who can afford San Diego County's soaring prices have already purchased homes, said Stan Sexton of Homesell/New Horizons Realty in La Mesa. Those who remain in the market are stretching to their financial limits. When they crunch final numbers to buy a house, they often fall short. 'Market has turned' "In Southern California, the market has turned," he said. "If you had to sell your house right now in San Diego, you would find fewer buyers and lots of listings to choose from." Economists blame the recent slowdown partly on high prices, signs of recent economic weakness nationally and the specter of rising interest rates. Despite the slowdown, most aren't ready to declare that the region's housing market has slipped onto quicksand. Housing prices have hit soft patches at times in the past few years only to rev up again within a few months. A revival could be fueled by recent, unexpected declines in mortgage rates, which fell last week to an average of 5.77 percent on 30-year, fixed rate loans, the lowest level since April. As prices have climbed in recent years, real estate experts have strongly disagreed over just how vulnerable the housing market is to a downturn. For economists who think talk of a housing bubble is hogwash, two arguments stand out: The supply of housing remains restricted and woefully inadequate to meet buyer demand in San Diego and California overall, and the economy continues to create jobs. "We have been in a production deficit for housing for five or six years now," said Raphael Bostic, an economist with the Lusk Center for Real Estate at the University of Southern California. "Is that imbalance likely to persist, and is demand likely to stay strong? I think the answer to both those questions is yes." Moreover, nearly every regional housing collapse has been triggered by widespread job losses. In Southern California in the early '90s, for example, defense industry cutbacks sparked a housing sell-off that depressed prices for more than five years. Today, California is adding jobs, including 12,300 in July, the state's fourth straight month of gains. San Diego County added 7,000 jobs in July and has been one of the leading job-creating counties in the state. "People say, 'There's a bubble. It's going to burst,' " said Matsuda, the Union Bank economist. "I ask those people, 'Do you think there is going to be huge job losses?' They say no. So I find it a little difficult to accept that argument." On the other hand, economists who believe a housing bubble exists say they aren't assuaged by arguments touting the tight supply of homes and the creation of new jobs. While California home builders have been producing only one new home for every four new residents, much of California's recent population gains have come from immigrants, said Christopher Thornberg, senior economist at the UCLA Anderson School of Business. Many of these new arrivals "don't have the ability to buy a house in Indiana, much less Los Angeles," he said. Consequently, while Thornberg believes there is a dire shortage of low-priced housing, he said the supply of higher-priced homes is close to matching demand. "The whole excess demand/tight supply thing has always been a bit of red herring," he said. "People think values are going to go up 10 percent, so they all rush into the market, and by doing so, they drive prices up 10 percent. That can only go on so long. Prices have far outstripped their fundamentals." Widening chasm For bubble believers, those fundamentals include the widening chasm between home prices and household incomes, and the cost gap between renting and buying. In San Diego County, the median home price has soared 129 percent in the past five years, hitting $472,000 in July. To afford that median home, a household would have to have an annual income of at least $116,000, assuming a 5 percent down payment and 30-year, fixed-rate financing at current interest rates. The county's median household income is $52,192, according to estimates from the San Diego Association of Governments. (Median means that half of the county's households make more and half make less.) It has not come close to keeping pace with soaring home prices, increasing only 10.9 percent in the past five years. Meanwhile, rents for the county's apartments have increased 35 percent in the past five years – a healthy gain, according to a twice yearly survey from MarketPointe Realty Advisors. Still, rents have fallen far behind the cost of buying a house. Based on MarketPointe's latest survey, the average monthly rent for a three-bedroom apartment is $1,547 in San Diego. The monthly mortgage payment for the median priced home – assuming conventional fixed-rate financing – is $3,500 a month. "You would have to see inflation-adjusted rents increase about 100 percent over the next 10 years to justify the prices we're paying right now for housing," Thornberg said. Of course, most buyers today can't afford conventional loans. So even though interest rates are expected to rise, many buyers are going with risky adjustable-rate loans – or even interest-only or zero-down-payment programs. In San Diego County, 76 percent of the home loans in July were one flavor or another of adjustable mortgages, up from 46 percent in September 2003, according to DataQuick. These borrowers are betting that either their incomes will increase or interest rates will remain low, so they can afford the monthly payments when their rates adjust. "We'll have to wait and see whether they win or lose that bet," said Bostic, the USC economist. "If they lose, there could be some real implications to the market because conceivably you could see the market flooded with all these properties." Even so, economists who do expect a significant correction don't foresee massive foreclosures or any of the disastrous consequences that marked the last real estate downturn in Southern California. Instead, what they anticipate is a market that grinds to a crawl, with prices not declining much but with a big decline in sales. And that puts first-time home buyers – the ones who might see scant appreciation over the next several years – at the greatest risk. "The reality is people who bought houses in 1999 and are trading up are going to be fine, because they rolled their equity from one house into another house," said Thornberg, the UCLA economist. "The people who are going to get hurt are those who can least afford it, those people who are getting into the market right now."
September 5, 2004