Market Report: June 2009

The market continues to present a series of mixed signals. The only certainty I have at the moment is that the residential market is on the way to recovery. The real question is not if but when there will be price stability. I think that moment is at hand; it is possible we are not at the bottom. I do not think prices can drop much further at this point in the cycle.

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The Great Recession

In my darkest moments I think this recession will never end and that New America will not be kind to real estate. Every recession breeds a howling pack of doom-seers predicting the certain Apocalypse. This media-enabled army of Cassandras is always warning of dire economic hell-fire that awaits us, economic sinners all. In addition the monthly foreclosure toll and the uneven financial markets contribute to my sense of unease and uncertainty.

These arguments resonate with me, in spite of my best efforts, because I recognize The Great Recession is no garden-variety downturn. Like Mr. Toad, we went on one wild ride too many, this time drunk on cheap Chinese loans. Many argue that the national housing bubble-hangover will last a decade and that America will be saddled with so much debt that we will forever be at the mercy of bands of international loan sharks and all end up working the front door at Wal-Mart.

One product we have in abundance is uncertainty and that is not all bad. I cannot recall any historical period, at least dating back to the Great Depression, where instability has become the norm. When winning is defined as not losing and doubt is as common as white bread. The flip side of this miasma is possibility. Every foreclosure story is told with two endings, one happy and one unhappy. Americans have a genetic disposition to recognize and seize economic opportunity; we are not heartless in this task but understand that every transaction usually has a winner and a loser and that is the nature of capitalism. Americans have adapted to working without a net and this alone will bring the economy back to life. Never bet against us, we are first and foremost a nation of hustlers.

The world has not come to an end, San Diego real estate is just being re-priced. People, in spite of an unclear future, still crave real estate and know there are bargains everywhere. Local housing, if you can hang on through the regular corrections, is a very forgiving investment. Population growth and inflation will see to that. Years ago I was complaining to a wise old apartment broker about an unwise apartment purchase I had brokered. His response was simple, "there is no bad real estate, only bad prices". He followed that with this helpful advice, "You will be alright in a few years".

The first half of 2009 represented a transition period in spite of the credit squeeze. The process of re-pricing San Diego's real estate wealth, especially because of the use of leveraged debt, in not going to be easy but we are well on the way to recovery. Banks, who played a major role in the past price-binge, are now acting like anti-banks. By making reasonable jumbo loans difficult to obtain, even though they are getting their money for next to nothing, lenders are playing a heavy-handed role in keeping current real estate values from stabilizing. It would seem to be in their best interest to allow effective demand to increase, therefore improving the security for their real estate loans. But then again thinking long-term has never been the strength of corporate America over the past two decades.

Lenders, for political and other reasons, have voluntarily slowed down the rate of foreclosures. Each bank will figure out their own strategy for unloading their considerable inventory of bank-owned homes in the least damaging way but I am not hopeful here. Past experience suggests that they will be ham-fisted about it and somehow get it wrong. They are distracted by the larger problems of sagging balance sheets, federal interference with executive pay, and potential huge commercial loan losses downstream. If they had their druthers they would leave the lending to some one else and stuff free Federal money in the vault.

The second foreclosure wave should be eagerly snapped up by the next generation of dreamers and builders. I do not feel the coming fire sale will substantially alter the course of the cycle and recovery. Prices should remain flat over the next 12-18 months as this inventory is sold. Owning property, in spite of the past ugliness, has not lost its allure among the masses. In the best of times, I never saw twenty offers for a property and we all know that is not that unusual these days.

This market is not without hopeful signs. In Mission Hills, there were no escrows opened for any home over $1,000,000 for a period of six months. In just the past few weeks, four have sold in this upper range. This was done in the face of a record and well-seasoned inventory. This market is recovering but not in the traditional manner that affects all neighborhoods and price levels. The road back will be bumpy but consistent.

In the past, the move-up market generated demand up the price chain. There is no question that the sub-$400,000 market is very strong but that does little for someone looking to sell a home for $600,000 and buy for $800,000. The 'seller' of that lower-priced property is now renting.

This is what I know; we are first and foremost a nation of hustlers and we will find our way out.

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