Market Report: March 2009

I will be on KOGO AM 600 this Sunday morning around 9:30 on the George Chamberlain show. I will on commenting on the Mission Hills' real estate market.

It is hard to keep this column fresh in light of how fast this economy twists around. I finished this yesterday and then UCLA's bad employment numbers came out this morning. As grim as they appear, I will stick to what I have written. I think the forecast ignores how persistent this President is going to be about employment.

Hold the Champagne

But at least put it in the refrigerator. The Administration's latest plan to sell off the spawn of the mortgage disaster and bring solvency to the nation's banking system will have an effect on the housing market but not until late 2010. The health of the local market, or more specifically the value of your real estate, is wholly going to be determined by saving existing and creating new jobs. Supply and demand, the traditional determinants of home prices, will not be as important during the recovery. People can overcome tight housing supplies by creating virtual housing; they double up or move back to Iowa and live with Mom.

Local real estate mavens love to talk about the positive economic fundamentals of San Diego real estate. I cannot argue with most of this analysis-I know there will be population growth, and it is a given that the replacement costs of new housing is going to be frightening. For example, market rate apartment construction is going to be at historic low levels over the next decade, as rents cannot support the cost of permitting and building new units. Last month only 86 permits were issued for all types of properties; in 1986 there were over 25,000 apartment units built. Ordinarily, these are all of the ingredients contributing to higher real estate prices. But easy financing will not be available and there may be a major shift in consumer habits when it comes to housing and debt. It could be this generation will carry the lessons of 2008 well into their lives, not unlike the children of the Great Depression. Social and economic change wrought from this time may preclude a return to the era of regular periods of raging house prices. By necessity we will have to live with less and this will have a major impact on the future of home prices.

As a society we should worry more about employment than appreciation. The President has made it clear by his actions that he will continue to advance programs and initiatives that will create and save jobs. Housing will not be politically favored and this pragmatic leader will not be afraid to reduce real estate's preferential place at the table. His predecessor enacted well-meaning programs that had a noble social goal: the expansion of home ownership. His achievement, moving the rate of homeownership from the low to mid-sixty percent level to sixty-nine percent was a pyrrhic victory at best and tragic at worst. This mistake will not be repeated in our lifetime and renting will become a permanent condition for nearly half of all Americans.

This has been a bleak winter for those of us in the realty business, both sellers and agents alike, but house prices will stabilize next year. This is a far rosier view of things than I had two months ago. My optimism is based on how I view the performance of the three economic ringmasters. The troika of President Obama, Mr. Geithner and Mr. Bernanke are focused on creating and saving jobs, which in turn will stabilize house prices. They are pragmatic and not afraid of taking bold steps with huge amounts of (your) money. Unlike the last Administration, this group is not frozen in the headlights.

Their demonstrated willingness to try all manner of solutions has garnered a fair share of critics from both the left and right. I know President Obama's core constituents are upset over what is perceived as a bailout of the ruling financial classes. The continuing saga over the AIG bonuses is but a part of a national suspicion that the pirates are not only given a pardon but also another opportunity to sack the Treasury. Critics on the right are positively apoplectic about what they see as the second coming of Karl Marx. Just watch Fox News for one hour and count the number of times you hear the words 'socialism' and 'nationalization'.

National re-sales for February were up, breaking a long losing streak. While this is good news it does not tell the entire story. The volume of sales is certainly important, but for most people it is prices that remain the primary concern. The free fall of home values will continue as long as lenders are forced to shed the their inventory. With the Administration's new toxic asset plan, we are not going to see a repeat of the colossally inept Resolution Trust Corporation. To refresh your memory, moneyed people were able to purchase at RTC auctions pools of defaulted mortgages and foreclosed-on properties at pennies on the dollar. They then cut the swag into smaller pieces and resold them for a huge profit or retained them for cash flow. This will not happen again; the President's plan will allow private investors to purchase, at free market prices, and dispose of these properties and mortgages in the most efficient manner possible. These for-profit operators will manage their new real estate inventories in such a way to maximize profit for both the taxpayers and themselves. The profit motive alone will insure a profit for the taxpayers. The bottom line for housing is that the flow of foreclosures should slow dramatically, not by any government fiat but by the pursuit of the dollar. The owners of this trillion-dollar package of problems will not shoot themselves in the foot.

2009 will not be a picnic but the good news is that the San Diego real estate market is bumping along the bottom of the trough. Will there be better opportunities if you wait? Of course there will but I am not sure they will be that much better than today. It makes more sense to focus on the temporary low cost of money. In the end, waiting for a killer deal may be a false economy if the price of money starts to increase, as it should once there is a whiff of recovery in the air. By late 2010 home prices will begin to inch upward, particularly at the upper end of the market.

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