San Diego real estate

San Diego real estate — We’ll start off with the good news for the housing market: The latest monthly data shows that towards the end of the first quarter prices started to fall at a more modest rate.

Following with the bad news: It’s been predicted by many insiders that even though the market decline has slowed, it’s very probable that we will still see a 5% drop in values in 2011.

Now, the ugly news about the housing market: According to Dataquick, a San Diego real estate tracking company, San Diego home sales for the month of May were off by 20% compared to May in 2010. Also, San Diego County median home prices in May were down 4.6%.What makes me call these figures ugly, are not so much the figures themselves. Though a 20% drop in home sales is an eye-opener, the more important fact is that the sales drop in home value decline is occurring in the seasonally best marketing time for real estate. Plus, the rate for a 30 year conventional mortgage is around 4 1/2%, just above the historic low of 4.2% in October 2010. The ratio measuring mortgage cost to renting is 7% below its’ normal, while the price to income ratio is 23% below its’ average. All this is occurring in an environment where home prices have fallen some 33% since the housing market’s peak.

Since I’m a San Diego California-based real estate broker, I’m naturally much more in tune with our local San Diego real estate market than the national market in general. From trade and financial publications I get a pretty good picture of the residential real estate markets across the country. There are bright spots for real estate activity and real estate prices. Recently there has been improvement in the real estate market in Alaska, Iowa, South Dakota, Michigan, Nevada, and perhaps one of the strongest real estate markets, in Washington DC. Washington DC’s real estate market is doing great from all the new government hiring and exceptional starting salaries and benefits.

The mainstream media, in my opinion, has overlooked the main factor as to why the housing market malaise continues. The number one factor is the fact that, at least here in San Diego, the top of the real estate market was in the summer of 2005. Many young people who were then in their 20s, and now in their mid-to-late 20s have seen firsthand how their parents, relatives and friends have been devastated by this housing bust. Instead of being anxious to jump into the housing market and get their first home, even with mortgage rates at historic lows, they have decided to take a more conservative approach and continue to rent until they are convinced that a solid bottom has been put into place in the real estate market. It’s hard to erase real-world experience with the platitudes put out by the real estate industry and the mainstream media.

The mantra of the real estate industry, “that it’s always a good time to buy,” still continues. I don’t blame the industry because one must consider that it’s a sales industry and therefore what else can they say? What they say is that real estate is a long-term investment, but how do you define long-term? What do you tell a newlywed couple who stretched their budget and were able to put 5% down on their first San Diego home in 2005? Now, six years later, is that long enough to be considered long-term? Not only has this first-time buyer had all their equity wiped out, but now they’re most likely negative at least 25% of their original purchase price.

Let’s put that scenario into monetary terms. If they paid $600,000, for their San Diego home in 2005, currently it most likely would sell for about $450,000. That would be a gross selling price, less standard expenses such as real estate commissions, escrow fees, title insurance, etc. These additional fees, would at a minimum, result in a net sales price of $427,500. So, in our example, this young couple would have lost, hypothetically speaking, about $172,500, in six years of their homeownership. This breaks down to an annual loss of $28,750. During their homeownership they expended additional cash for home insurance, home maintenance and mortgage interest and real estate taxes, at least a portion of which they could not write off on their income taxes.

You have to agree it is not always a good time to buy real estate! Even now, in the face of San Diego’s 20% drop in real estate sales in May, there are many who deny, at least in public, the fact that San Diego real estate has not only entered into a double dip for housing prices, but also nationally, this real estate market is worse than what occurred during the Great Depression!

Will clichés like “the summer of recovery,” or “the economy has turned a corner,” really be enough to translate into a market bottom for our devastated housing industry? At least for the balance of 2011, this seems highly unlikely.

I wish I could bring more optimistic news on the housing market. I did not buy into the fantasy climate prevailing in California, the denial of reality, and the mantra of you can’t lose money buying a home in San Diego. You would think, that the harsh reality of the past six years would have snapped most Californians back to reality. My own local observations still seem to show that perhaps 20% of San Diego homeowners believe this market is about to turn and they can break even in a year or two.

Perhaps, when the inevitable flood of the billions in unspent stimulus money is released in 2012 to bolster the reelection chances of the incumbent, this spending will put in a solid base on which a housing recovery can truly occur. Keep in mind that to date, all government housing programs that the current administration has put into place have been dismal failures. These programs, in my opinion not only squandered the taxpayer’s money, but actually have prolonged any real base building in the housing market.

Perhaps the government should stay out of the housing market; at least then a true bottom can be established.