Everyone's watching the economic indicators looking for good news and signs of recovery. The latest Case- Shiller index of home prices around the nation was not the kind of sign we are looking for.. The graph shows a huge decline in home prices bottoming out in 2009... rising in 2010 and then falling again quite sharply in everyone of the first three months of this year. Is this a double dip in home prices, and is San Diego following the national trend?
Guests: Gary London, real estate economist with London Group Realty Advisors. PHONE: 890-1033 cell.
Alan Gin, professor, School of Business Administration, University of San Diego
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ST. JOHN: And this is KPBS Midday Edition. I'm Alison St. John in for Maureen Cavanaugh. Everybody's watching the economic indicators, looking for good news. Signs of recovery. And the latest Case-Shiller index of home prices around the nation was not the kind of sign we were looking for. The graph shows a huge decline in home prices bottoming out in 2009, rising in 2010, and then falling again, quite sharply in every one of the first three months of this year. So is this a double dip in home prices and is San Diego following the national trend? That's when we're gonna be speaking about now with our guests, Gary London, who is a real estate economist with London Group reality advisors. Gary, Hi. Thanks for being with us.
LONDON: My pleasure.
ST. JOHN: Thank you. And Alan gin, also is professor of the school of business administration at USD. Alan, thanks for being here with us.
LONDON: Good afternoon.
ST. JOHN: So, Gary let's start with you. We heard at the top of the news, it was the top story that home prices are down every month in the first quarter. It's a new low. And I gather that you find some fault with this index. Tell us why?
LONDON: Well, the index is empirically valid. The issue of what activity in terms of sales are going on out there. The problem with the index is two-fold at least. One is that it is a classic lagging in reflecting data from the first quarter of this year, as you have indicated. But that data from the first quarter actually reflects transactions from last year for the most part. Or the very beginning of this year. So things might be better now than they were then. That's problem number one. Problem number two, and the big problem is that all case schiller does is measure the sales activities that are current. What they don't measure is the activity that is not occurring. And in San Diego in particular, we have had a record low number of transactions in the last few years. Something that's happened, most of the transactions have been either literally or functionally distressed. In other words, I divide the market into two places. One is the have to, and the other is the want to. The want to, people want to sell their homes but don't have to. And are not being measured by case schiller. It's just the distress, the foreclosures, these kinds of people in these situations, banks loans distressed housing, basically putting them back on the market at cheaper prices. Now this isn't to say that the market isn't weak, it's unbelievably weak. But it is to say that the market is probably not in a double dip. It's probably just bouncing along the bottom right now. And as we see economic recovery, we're gonna see a better housing market.
ST. JOHN: Well, let's just look a lot bit at this Case-Shiller and how it said that we might be different from them. Because certainly when you look at the graph, it doesn't look like it's bouncing on the beg your pardon. It looks like it's going down. But is this really an illusion to qualify a national housing market? Or is really every area in the state different?
LONDON: The idea of a national housing market is an illusion. It's not possible to quantify it. You have to look at the market in terms of each region individually. What's happening in Phoenix or Las Vegas, which is far more dire than San Diego has nothing to do with San Diego. In fact, our market circumstances are quite the opposite than theirs. Never the less, we are going through a market clearing stage right now around the nation, even though you're seeing the numbers look like they drop significantly, we're really talking about a couple percentage points, and that's why I prefer to use the term bouncing along the bottom.
ST. JOHN: I see. So what about the San Diego market then? Which housing prices are low here?
LONDON: Well, the housing prices that we're seeing reflected in Case-Shiller are largely based on the transactions and distress that's occurring in the south county and east counties. It's not reflecting as much in the coastal markets. Although those markets have dropped as well.
ST. JOHN: So are there very definite areas in San Diego where prices are actually perhaps holding steady or even growing?
LONDON: It's hard to say that that's the case. Although I think that you'll see I differentiation between distress in home prices, say, that are under four hundred thousand dollars. In the markets, there's a high level of distress of the lower middle priced housing right now.
ST. JOHN: And what about bank owned properties? Are they skewing the market? Are they still pretty much keeping the whole thing down?
LONDON: This is the illusive thing. We don't know for sure. We know, of course, that banks have taken back a lot of home assets and have been sort of hoarding them against hope, hoping that the market gets better. Before they put these on the market at a higher price for it. We actually don't know how much inventory is left. What we do know is that the amount of trust deed sales or foreclosure activities peaked in 2009, and peaked at a very high level. However it has gone down significantly over the last year and a half. So we think that we've reached the peak in terms of foreclosures, what we don't know is how much is there left.
ST. JOHN: Uh-huh.
LONDON: I don't think that there's enough left, however, to impact the market where we get a radical double dip situation in this county.
ST. JOHN: Okay. So no double dip according to you in the San Diego housing market. And Allen gin who is with us also from USD, you have your economic indicators which pretty much supports what Gary London is calling. What are some of the signals that you have that San Diego is not suffering as much as the rest of the nation?
GIN: I think that Gary has it absolutely correct in that a lot of the problems in terms of the housing is just reflected by the distressed sales. But we released our latest report of the leading economic indicators this morning, and the index was up. Up nine tenths of a percent. So that's the 25th straight month where the index has either been up or unchanged. So that is suggesting that we're gonna have continued growth in the local economy for the rest of the year.
ST. JOHN: Okay, so 25th month. And yet for the last couple of years, we've been seeing things sliding. But your indicators are going up. And you are saying that basically San Diego is bucking the national trend.
GIN: We hit some sort of bottom a while ago, and we've just been drifting along at that bottom. We're seeing signs that the economy is picking up, particularly on the employment front, we're seeing job growth again although not as fast as we would like. The latest unemployment reports show that we've dropped below 10†percent for the first time in almost two years. So if we can get some positive activity in terms of employ. That'll help in terms of the over all economy, it should help in terms of the actual market as well.
ST. JOHN: Right?
GIN: That's correct.
ST. JOHN: Because that really relates to the big question, is can people afford to buy a house? Each if prices are down, do they have a job, can they afford to buy a house? And that's a big question.
GIN: That is one of the keys. So we've got something supporting the housing market right now. Again, a little bit of job growth. We do need more. But also interest rates are near historic lows. So that too should help in terms of housing purchases.
ST. JOHN: But Gary, I think a lot of people are saying the problem is, we cannot get a loan. Even if interest rates are high, if you cannot qualify for a loan, you're stuck right?
LONDON: Yeah, it's an irony because interest rates are at an historic low. But the pendulum in the lending business which swung so far the other way, to the point where the -- the pendulum has now swung completely in the opposite direction where even formerly well qualified people have a difficult time getting a loan. And we'll see the lending industry start to swing back to the middle at some point.
ST. JOHN: Well, when? What will it take for the lending industry to start swinging I think is the question.
LONDON: I think a lot of this is behavioral and psychological. I think just to support Allen's numbers which are being reflected both locally and nationally, once people start to realize that their economic circumstances are getting better, that job numbers are starting to improve, then we're gonna see -- it start to float back into the housing market, both as buyers and sellers. And at that point, lenders probably are going to participate at a more aggressive level. But I do want to add that there is money out there, and lenders are loaning, we just have to be ready for this time around, you gotta put a down payment down, maybe a little bit more of a down payment, you have to have a good credit record, and a good job record. There are many people in San Diego that do qualify even on tougher terms right now. And the irony of this whole conversation is that because -- that homes are cheap, and rent levels are rising, and if you really want to be smart in terms of your home investment, this is the time to be purchasing.
ST. JOHN: So you know, you're saying that you're thinking the lending industry might start to turn and should start to turn bolstered by some of the indices that Alan is talking about in his index. When we talk about this subject, it seems like things might just be about to turn. What is it that it's gonna take? Is it jobs?
LONDON: Well, you know, the irony again that I've appeared on your show several times over the last couple of years. I keep thinking, particularly last year, that the market has turned. And it just hasn't yet.
ST. JOHN: Right.
LONDON: As I say, wee bouncing along the bottom. And it's frustrating for all of us in the prognostication business because we've never seen the world move so slowly as it is today. You have to have some faith. San Diego is bolstered by a plastic supply and demand imbalance. We don't have any supply. No supply coming out. We've got economic growth. It's inevitable that we're going to see a bid up in housing prices, and lending standards start to reflect more activity. Whether that happens this year or accident in, that's hard to tell at this point.
ST. JOHN: And Allen gin is sitting here nodding, you pretty much agree with that assessment, Allen?
GIN: Yeah, one of the strongest components in our laziest reports is residential units authorized by building permits. So that was just a lot of construction activity. But if you look at the details, it turns out that single family constructions single family permits are down compared to last year. So not building the single family areas would lead to the constriction of supplies again that Gary was talking about. . The big gain that we have had is in multifamily units. He's indicated that rents are going up, and so right now, multifamily units construction in terms of permits, about five times what they were during the same period last year.
ST. JOHN: That's interesting. I know that SANDAG, the San Diego association of governments, has predicted that that is one of the things that will help in the future. More multifamily homes. I mean, that could really change the character of a lot of San Diego's neighborhoods, couldn't it?
GIN: Yeah. I think developers have really responded to the shift in terms of the returns by shifting away from single family homes and into multifamily development.
ST. JOHN: Gary, you wanted to comment on that?
LONDON: Yeah, I mean, Allen is correct. It's a sea change that's occurring in the delivery of housing in San Diego County. SANDAG predicts that over two thirds of the housing that will be built over the next twenty years is going to be multifamily, condominiums and apartments. And that's because we've run out of land or at least we've run out of developable land, we've created urban life around the incorporated areas, it looks like so we're not gonna have a lot of land supply. Which means we can only build vertical, which means we can only go up, which means we're gonna see a lot more condominiums. Whether that's gonna play well in this market, but it means particularly there's gonna be a scarcity of single family homes over the coming years.
ST. JOHN: Good. Gary, thanks so much for joining us. That's Gary London, real estate economist with London Group Realty advisors. Thank you Gary.
LONDON: You're welcome.
And Alan Gin, professor of the school of business administration at the university of San Diego. Appreciate your perspective, Alan.
GIN: Thank you.
