There’s always something to howl about.

San Diego Housing Industry Outlook For 2009

I’m going to republish a little forecasting I did, about ten months ago, on Active Rain.  I’ll offer some comments in italics (discussing 2009) and welcome yours in the comments section:

Lenn Harley caught something I said a year ago and found it to be prescient (her word); I wish I were wrong.   The comments in her post suggest that I should talk about the upcoming year; I really don’t want to do that because I don’t have great “visions” for 2008.  Some thoughts about the next 12-18 months:

1- More not less of the foreclosure activity we saw these past 5-6 months will continue through 2008.  A combination of ARM resets, tightened loan guidelines, and affordability problems will affect American homeowners in a  dramatic way.  It’s easy to levy the blame on Greenspan, mortgage originators, Wall Street, or REALTORS but at the end of the day, the “greed” ultimately came from the homeowners.  The American homeowner, aided by some opportunistic market participants, got drunk on the drug of materialism, financed by a world wide capital glut.He partied up the profits while the clock struck twelve.  The foreclosures and continued short sales will be the hangover from the five year orgy we had in the first part of the decade.

Well, duh.  I didn’t need a looking glass to see that.  It now looks like Wall Street was the sugardaddy that financed this party, by borrowing from foreign investors.  They’re paying dearly for it today.  The good news for 2009 is that those drunken sailors from Wall Street (my apologies to beer-sipping Navy veterans) are getting rounded up and placed in rehab programs.  We might see some stability after this most recent intervention.

2- The housing recession will extend to the American economy. Homeowners drew upon home equity like a a high-roller draws chips at the Venetian hotel in Vegas.  Nobody will “stand up” for them with the bookies anymore.  The money spigot is shut and won’t be turned on no matter what the Fed does to interest rates.  Less money means less disposable spending dollars.  While, Virginia, there still is a Santa Claus, he won’t be staying long at your house this year and might just skip you next year.

I’m not sure about this.  The economy seems to keep growing… and growing… and growing.  I might have underestimated the ability for the American economy to innovate.  Robert Kerr and Michael Cook will probably offer some opinions and facts that support last year’s statement.  Today, I’m more optimistic  about the economy than I was last year.

3- There will be a marked class distinction that develops within the next 6-7 years. It won’t be determined by assets but by debt and its utilization.  Those that respected money will get more of it; those that didn’t respect it will lose it.  That will have a profound effect on productivity as the “hourly worker” will become despondent about his life and stop pushing for the overtime.  Why work the extra hours to make the mortgage payment when the house was lost in foreclosure?  A commitment to mediocrity will be the mantra of the American worker because every disposable dollar will be spent paying the bar tab he ran up five years ago.  Personal bankruptcies will rise.

This was the first real “social” observation I made.  I suggested that the “rich will get not rich and the poor will get clobbered” in San Diego County.  What I was most concerned about was that  the American “spirit” would be broken.  If the middle class dream is taken away, crime and anarchy can run rampant.  I suspect Greg Swann will have some good observations about why the “middle-class dream” is a necessity in a peaceful society.

4- Housing prices will drop…more. The aforementioned reasons for foreclosures rising will be the same pressures felt in the housing market in 2008.  Prices will continue to drop until a level of affordability can be established.  That means that the investors (real investors put 20% down) will step in when the deals cash flow.  It also means that until the rent v. buy figure is at parity, the incentive to own will be tabled until the economics of homeownership make sense.  Determine the median income for your metro area, multiply it by 5 and that’s your new median price.  In San Diego, the income is about $70,000 which predicts a median price of $350,000, far below the current $470,000.  That suggests another 15-20% drop in prices here.

I think I underreached here.  Four times median income is more reasonable for San Diego, which suggests a median price under $300,000.  I was right; San Diego County’s median price hit $350,000 but I think I was softening the blow by stopping there.

I mentioned on another post, that weblog since disappeared, that the San Diego County housing market would bifurcate.  I suspected that any income growth would happen on the top end and that the bottom half would see little to no income growth.  Combine that with a liquidity crisis and the lower-end homes would get slaughtered while the upper-end would just decline a bit.  That happened in San Diego County; lower priced homes are starting to make lots of sense right now.

Next year, I suspect we’ll see a convergence of housing prices as the higher-priced homes follow the lead the of the lower priced homes’ decline.  The median price may very well drop but the lower-priced homes will hold value.  The government is doing everything possible to provide liquidity to the lower end of the market but there will be NO financing available, over $625,000 next year.  Watch  Solana Beach, Encinitas, Poway and Scripps Ranch nose dive while the cash-heavy communities of La Jolla, Rancho Santa Fe, and Del Mar drop just a bit.  Sell that duplex in Cardiff and buy a four-plex in Imperial Beach, if you’re an investor (I imagine Jeff Brown will tell you to just get the hell outta Dodge).

5- Real estate agents and mortgage originators will flee the industry faster than teenagers bolt from a keg party when the cops show up.  It is my belief that  fully 9,000 of the 14,000 licensees in San Diego County won’t make a living wage this year; expect most of them to be on to another job next year.  The remaining practitioners will be fielding calls and e-mails from disgruntled homeowners like a an airport gate agent in a snowstorm.  Learning how to say “No, I’m sorry I can’t be of assistance” will be the single best script to learn for next year.  Smart practitioners will learn how to properly qualify WILLING buyers and sellers and will profit immensely from it.

Yep.

6- People will buy homes, they always do. A culture of opportunism will develop among the buying pool and if left untrained, they will drive practitioners insane.  The wise REALTOR or originator will assess motivation as much as qualification before accepting a brokerage or financing engagement.

Of course, the sellers have to play ball as well.

7- Fundamental underwriting guidelines will reign supreme for the next 12-18 months.  Think Y2K when you think of lending.  If you weren’t around back then, ask me for help.  FHA financing, being touted as the “catch-all” for the wounded borrowers, will be woefully inadequate to handle this debacle.  While FHA offers expanded credit and LTV guidelines, the ability to repay the loan is still required.  John and Jane Homeowner just don’t make the money to support their debt-load.  100% financing won’t go away for those with sufficient credit, reserves, and income.  First-time home buyers will emerge as the predominant players in the home buying market.  Relationship building, counseling, and firm but encouraging advice will need to be dispensed.

No big surprise.  I was correct and incorrect here.  FHA is a BIG player now, in San Diego County,  Since loan limits have been expanded to $697,000 (soon to drop to $625,000) and PMI companies are in the tank, government lending is an important part of mortgage finance.  100% loans are gone unless you’re a veteran or if the Nehemiah folks prevail in the groundswell efforts.  The US government is supporting low down payment housing finance in the $625,000 and below market, for San Diego.  Everyone else will be screwed.

8- More home buyers will go online to start their home search. By reading this article, you are at a decided advantage over your competition…you’re here, already.  The very nature of the on-line home searcher demands that you do free work before you ever talk to them.  Successful practitioners will “convert” these modern day “open house looky-loos” into viable prospective clients by getting them onto the phone, then to a lender, and ultimately into their office to sign an exclusive buyer brokerage agreement.

This, to me, is the real opportunity for practitioners.  Economies and industries go through paradigm shifts every 20-30 years.   The website is the new “open house”.  Thirty years ago, the mantra “listers last” was all important advice to a new real estate agent.  Today, inventory has been democratized through the IDX search on a website.   Open houses then, are a good time to work on your SEO.  A REALTOR who controls the SERPS rather than the inventory should profit best from this buyer-centric market.

2009 should offer great opportunities for San Diego agents and originators who get focused on activity.  I think there will be a lot of activity in the lower end and profitable activity on the luxury end of the market.  If you dominate the luxury home market in La Jolla, don’t change a thing.  If you’re working with buyers in Eastlake, you should do well.  It’s the listers of $800,000 homes, in Carmel Valley, who may be in for the biggest surprise next year.

PS:  If you’re headed to the NAR convention, in Orlando, you might consider this marketing session.  For the price of a tank of gas, you’ll learn how to shift your business and learn how home buyers find their REALTOR and lender.

PPS- If you’re a San Diegan and not in the real estate or lending industry, you might want to pick my brain or argue with me; both are encouraged.  You can find me here.