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For San Diego Real Estate, the Skies Are Not So Sunny

Signs of a chill are spreading in the state's hottest market. Care to speculate on the future?

July 17, 2006|David Streitfeld | Times Staff Writer

SAN DIEGO — For a long time, this was a cruel place for any would-be homeowner who didn't have a wad of bucks or a tolerance for the high-risk, short-term mortgages that some call suicide loans.

Finally, the seemingly unstoppable ascent of real estate here has stopped. Last week, reports showed that the city's median home price dropped 1% in June from a year earlier, the first decline in a decade.

That should be good news for Carmen Buck, a 29-year-old homemaker who has been saving and hoping for a house. But she sees little to celebrate.

"Homes were more in reach a year ago," Buck said.

Prices might have been a bit higher back then, she noted, but interest rates were a whole lot lower.

The long-awaited shift in the market's direction isn't pleasing many others, either. Sellers are chopping prices to get deals done. Buyers worry that values will continue to fall, putting their investment at risk. There's widespread uncertainty, and some anxiety, about what happens next.

San Diego had the wildest run-up among major California cities, with prices tripling since the mid-1990s. The boom was stoked by cheap loans, changes in tax law, creative financing and a generalized mania that fed upon itself.

The market also began to fade first in San Diego. The craziness seemed to peak about two years ago, when bidders routinely submitted letters saying that they and their children would be forever honored if the seller would consent to choose them.

Whatever happens here, optimists and pessimists agree, will happen later in the rest of the state.

That's about the only thing everyone agrees on. The size of the coming hangover is a particularly contentious matter.

Most analysts and people in the real estate industry insist it will be mild. The housing bears say the bulls are either misguided, uninformed or shills.

At a Century 21 sales office in the Ocean Beach neighborhood, broker David Davis said the market had already bottomed out. The spring was weak, he acknowledged, averaging only one or two sales a month -- half the office's usual rate.

But things are already back on track, Davis said. He expects four sales this month, about normal.

The last San Diego real estate collapse, which hit in the early 1990s, was triggered by convulsions in the aerospace industry. The post-Cold War downturn caused widespread unemployment and a generalized exodus from much of Southern California. High interest rates contributed to the misery.

"Our No. 1 industry is now tourism," Davis said. "Unless they take away the sun, we'll be fine."

He's putting his money where his optimism is, spending $187,000 over the winter for a downtown condo he'll live in. He knows other agents who are buying too. "I think they see a good thing," he said. "Buy low, sell high."

If Davis radiates cheer, the fliers taped to the window outside the office door tell a different story. "Huge Price Reduction," one says. Another says both "Reduced" and "$15,000 Credit."

In some cases, the prices are dropping faster than the fliers can be reprinted.

A two-bedroom town home has its price of $324,900 crossed out with a marking pen, replaced by $309,900. Another house, a four-bedroom in suburban La Mesa, has a printed price of $575,000.

Below that is handwritten $549,000.

Scribbled below that is a new minimum: $499,000.

What helped supercharge the San Diego boom was the spread of unconventional financing methods.

Some adjustable-rate loans allowed buyers to postpone payments on the principal. Sometimes the loans allow the buyer to pay only part of the interest, tacking the remainder onto the loan itself.

The advantage of these loans is that buyers can afford much more house. The disadvantage is that they reset quickly, which is why critics call them suicide loans. After the grace period expires, the payments can skyrocket -- particularly if it is a time of rising interest rates like the present.

Holders of these loans can't afford to see prices decline. Yet for everyone who has been shut out of the market, the only hope is a drastic slide.

"Houses really need to fall by 50% to become affordable again," said Tom Scott, executive director of the San Diego Housing Federation, a coalition of nonprofit and advocacy groups. "It would be better for everyone if the price of housing fell."

Buck, the homemaker, said she and her electrician husband, Andre, might start looking at foreclosures. Notices of default, the precursor to foreclosure, reached 1,533 in San Diego County in the first quarter of 2006, up 60% from the year-earlier period, according to DataQuick Information Systems. The number is still low by historical standards, however.

Rich Toscano, a former technology consultant who was recently hired at a financial planning firm, expects the Bucks to have many more repossessed homes to choose from soon.

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