State of the San Diego Real Estate Market March 2009

Reminds me of this gold rush movie (one that I recommend watching if you have a chance)

Okay, it's not quite like that, but correctly priced properties are flying into "Pending". It has to do with supply and demand. At $600,000, comparatively few people can really afford a single family detached property. But at $400,000 and under, there's a whole lot of offers going on.

There were signs of this turnaround all last summer, but it really hit hard after Columbus Day. All of a sudden, I was busier than the proverbial one armed paper hanger, and all the correctly priced properties were seeing multiple bids. I've put in offers on thirty-five or forty properties in the last few months, and I can count on the thumbs of one hand the times my clients' offer was the only offer. Yes, I know that listing agents often pretend there are other offers, but a good buyer's agent knows what to look for to indicate whether there really are other offers.

Sales prices aren't being negotiated down very often, either. If I'm representing the only offer, the sellers and their agents aren't in what might be considered the strongest of negotiating positions. If there are three or four other offers in play, however, the trick is to get the property without outbidding the other prospective buyers by any more than you have to. The best trick is not to offer more money, but to learn what things other than money influence an informed seller. These things vary from situation to situation. A short sale wants slightly different things than lender owned property who in turn want something slightly different than ordinary sellers. You can't reason with a seller who just wants the highest bid, but you can reason with a competently advised seller who understands that a purchase contract does not equal a consummated sale.

In all three cases, we have to deal with a paranoid lending environment. Fannie Mae and Freddie Mac have (within the last month) relaxed their standards to once again allow lending to someone with up to ten real estate loans, but the odds of this happening are essentially non-existent due to the fact that they have made it extremely difficult to get credit for rental income from investment property. Without rental income, debt to income ratio is too high for the prospective borrower to qualify under the standards for Fannie and Freddie, leaving your alternatives as portfolio lenders at a higher rate of interest, once again impacting debt to income ratio, or the high down payment requirements of commercial loans. A large part of the reasons for Fannie and Freddie cracking down thus are the prevalence of "buy and bail". Most people are not intending buy and bail, but it's very difficult to prove that you're not, and Fannie and Freddie's standards are about prospective borrowers proving that they can afford the entire situation. Even portfolio lenders are decidedly on the paranoid side right now, and for good reason: If you default, it's coming directly out of their pocket. There is no more selling the loans to idiots on Wall Street who are only looking at the interest rate because "real estate never loses value!"

Over forty percent of prospective buyers with a fully negotiated purchase contract here in San Diego have been unable to consummate the transaction because they are unable to actually get the loan they require. The fallback of stated income is gone except for a few portfolio lenders, and they've got pretty draconian rules themselves, like "You can't own any investment property!" at one. Equity requirements from maximum loan to value ratios on purchases are as hard as concrete, and they're even harder if you've got investment property. If you don't have thirty percent equity in every other property you own, you should probably plan on being forced to sell that property in order to buy another one.

As far as loans go, I'm just now getting comfortable with telling people I've got conventional loans for 95% of value - requiring 5% down. I've had one program for quite a while, but now I've got a second way to get it. Both require PMI, but better to pay PMI than not to get the property while it's cheap. Anything over eighty percent loan to value on a single loan is going to have PMI required - it's sourced in Federal Reserve Rules, and trying to evade the requirement is a recipe for trouble - legal trouble as well as a failed transaction. Since second trust deed lenders don't want to go even to 90% of value right now (and some are limiting themselves as low as 75%), your choice is basically a single loan with PMI or no purchase. You might as well take it into account before you make an offer - and if you're a seller, make certain that any buyer you accept based upon less than 20% down can afford the PMI as well as the basic payment. Pre-qualification and pre-approval letters have an ugly habit of not doing that.

FHA loans require 3.5% down payment, and they have their own mortgage insurance requirements - 1.75% of the loan amount up front plus 0.55% per year, and the basic debt to income ratio limit is 43% instead of 45%. Make sure your calculations of Can I afford this property include those figures. You would be amazed and disgusted how often buyers and their agents and loan officers base their "Can we qualify?" figures upon what's basically wishful thinking, because it doesn't take into account things they need to pay. Both FHA and VA loans restrict what properties they are willing to fund loans upon far more than conventional lenders. There is a laundry list of disqualifying characteristics that can mean you can't get a government loan on the property.

VA loans are still the magic bullet, as they will fund loans up to 103% of purchase price, meaning no down payment. However, they've got the same rules as FHA as to what they will and won't fund as far as property goes, and they won't permit buyers to be charged for many real, legitimate fees of getting a loan done, which means that lenders often have no choice but to make their money via yield spread or secondary market bond premium, which means that available rates may not be as low as other loan types in some situations. However, there's no mortgage insurance on VA loans, a fact that makes them inherently superior to FHA loans if you or your spouse have VA loan eligibility.

San Diego property has become affordable again. The most recent set of figures I saw said that seventy-three percent of all families in San Diego can now afford a median entry level property. Given this fact (particularly as opposed to the nine percent affordability ratio a couple of years ago), it's no surprise that people are looking to buy. Once current inventory clears, expect prices to be off to the races again. We may not get twenty percent per year for five straight years, mostly due to the investment property constraints, but I'm expecting solid noteworthy increases in prices before the end of the year. In some highly desirable areas, prices have already been rising for nine months to a year. Inventory is in the process of clearing out the backlog - we're down to just over 15,000 active listings from 18,000 a couple months ago. When we get down to ten or twelve thousand active listings, we'll see countywide price increases again.

The conclusion is quite strong: If you're a buyer, the time to move is now. If you're a seller, hold on if you can. If you're looking to sell so you can buy something else, talk to me. Prices are going up soon. Furthermore, with all the building restrictions we still have in place, I would bet serious cash that real estate prices are never going to be this affordable again.

Caveat Emptor