Is Local Real Estate Starting to Turn Around?

MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh. You're listening to These Days on KPBS. How is the San Diego real estate market doing? Well, the answer to that question seems to depend on where you are, what your price range is and what kind of property you're talking about. In June, San Diego home prices showed the first month to month increase in more than two and half years. There's also been interest in the lower end of the housing market, as first time home buyers try to take advantage of a homebuyers tax credit that expires in November. But that is just about the extent of the good news. This summer, the rate of home foreclosures continued to increase in San Diego, the credit market remains tight, and then, there's a looming issue of the so-called shadow inventory of unreleased foreclosed properties. Overall, there's a lot of confusion about San Diego's residential market, and a lot of concern about what's ahead for commercial real estate. Joining us to explain what's good and bad about the present day real estate market are my guests. Gary London, a real estate economist with the London Group Realty Advisors. Gary, welcome to These Days.

GARY LONDON (Real Estate Economist): Thank you, Maureen.

CAVANAUGH: And Matt Battiata is CEO of the Battiata Real Estate Group. Matt, welcome back.

MATT BATTIATA (CEO, Battiata Real Estate Group): Good morning. Thank you.

CAVANAUGH: And we invite our listeners to join the conversation. Are you thinking about buying while housing prices are low? Or if you have to sell your property, what should you expect in this market? Give us a call with your questions or your comments. The number is 1-888-895-5727, that's 1-888-895-KPBS. Gary, let's start out by talking about commercial real estate. And can you give me an overview of what's happening? What's on the horizon with commercial real estate right now?

LONDON: Well, sure I can. The – If the residential market was one shoe to drop, the commercial market is probably the other shoe to drop. We're – We probably are just at the beginning of a significant decline in the commercial markets. And when we say commercial markets, what I mean by that is investment properties and office buildings and retail shopping centers and strip commercial and that sort of thing. And, you know, it would not come as a surprise that we're going to see problems in that sector because, obviously, we're seeing lower consumer spending, we're see – which cause problems in commercial revenues ultimately translates into the real estate, and we are seeing companies in this recession compress in size, causing vacancy rates which cause lower revenues which cause distress. So essentially the same basic factors that we saw sort of playing out in the residential sector are now going to play out in the commercial sector. It won't play out the same way. We're not going to see probably the same levels of foreclosures that we've seen in the residential sector. It's a more sophisticated game, but the commercial debacle's probably just beginning.

CAVANAUGH: Why has it taken all this time? Why did we see this down trend in com – in residential real estate and now it just seems to be hitting commercial real estate?

LONDON: I think it's delayed distress. I think essentially there are lease – leases that are now – You know, in residential, we talk about reset of mortgages, you know, and that happened early. In the commercial world, we talk about leases that are sort of ready to expire and so people are making those decisions, or delayed reaction associated with lower consumer spending. These are mostly businesses making business decisions. Their longevity has sort of, by definition in the industry, been a little bit longer so now we're seeing the playout of that.

CAVANAUGH: And is there anything to the idea that, let's say in a shopping complex, as a business goes out of business, they can't all – they can't fill that property and get that rent and, therefore, that has a cascading effect on some commercial real estate?

LONDON: Oh, it absolutely does. The – Historically, when business – when retailers failed, went out of business, they – there was always someone on the sidelines waiting to fill that space. But you don't have that sideline activity at the level that you had it, you know, a few years ago when the market was much stronger, coupled with the fact that, you know, these businesses are just now compressing. You know, the ICSC is in town for their regional conference, that's the…

CAVANAUGH: And the ICSC is…?

LONDON: That's International Council of Shopping Centers and their Southern California region is meeting this week here in San Diego at the convention center and they're talking about this very topic. And what they're talking about is retails whose – retailers who are downsizing, shopping centers that are redefining themselves. In other words, as shopping centers start to see vacant space, and we've seen this already in our business, where, for instance, Albertson's has gone dark in a number of locations in San Diego. Well, how do you fill a 40,000 foot space? You don't fill it with another grocery store because if Albertson's failed who else is going to succeed? So what you have to do now is think of what we call adaptive reuse. Maybe an apartment building belongs in that space. So there's going to be a lot of sort of dynamic changes in the commercial sector as a result of the downward spiral of that sector right now.

CAVANAUGH: And before – just before I bring Matt into the conversation, we did a show a little while ago about receivership, a lot of commercial properties going into receivership instead of bank foreclosures. Is that also playing into what we're seeing in the commercial market now?

LONDON: Well, I don't think – You know, we're going to see some receivership activity, obviously, in the commercial sector. I don't see your go – I don't think you're going to see quite the level of activity on the commercial side as we've seen on the residential side. Essentially, deals will be worked out. Banks aren't going to be as enthusiastic in most cases to take back properties because somebody has to manage it. It might as well be the people that are managing it today. They'll just cut different deals. So I don't think we're going to see sort of the distressed activity at the same level that's seen as residential. Although we've seen some of it already just not – I think what we're going to see is just a new economic platform that's being created based on lower revenues and not the certainty of values keep going up and up over the years. It's going to change sort of the economic picture.

CAVANAUGH: Well, now I turn to you, Matt, in a discussion of what's going on, excuse me, in the residential market. And, you know, we hear all sorts of things. I mean, good news, bad news, we haven't hit bottom yet. We're on our way back up. What's your take on what's going on?

BATTIATA: Well, you know, there are – what we've seen in the last few months is that there's been news come – that's come out in the media that, you know, for a particular month the median price has tracked up by a percentage point or – and so forth, which is new because it hasn't happened over the last handful of years. But, unfortunately, there's a lot of false, you know, I'd call those false positives. Just because the median price bounce – you know, might in – actually go up by one or two percentage points in a given month, unfortunately is not cause to say, you know, the bad – you know, the good times are back and that the residential market has recovered. The reality is in San Diego County, we've dropped, really, the reality is, about 50% because you have to remember that when the bank takes back a property as a foreclosure sale, a trustee sale at the courthouse, typically what happens is the bank forecloses on your home, you owed $700,000.00 on it. They start the bidding, not always but usually, at $700,000.00 and no one's going to bid $700,000.00 on your house because it's not worth anywhere near that. And so what happens is, no one bids on it, the bank takes it back. That becomes what we call an REO, a real estate owned by the bank. The County Recorder's office records that as a sale at $700,000.00.

CAVANAUGH: Wow.

BATTIATA: Now, obviously, that's the exact opposite of a sale, number one, and it sure as heck is not a sale at $700,000.00. So when DataQuick pulls the numbers, they factor that $700,000.00 sale into the median price. So when you have lots and lots of foreclosures, guess what? It looks like there were more sales than there were in previous months and it also looks like the median price has gone up a little bit because those numbers are not accurate. So when we have – You know, we've had several – We've had more than – We've had three or four moratoriums that have gone into effect, foreclosure moratoriums. There's a huge, huge, number of residential foreclosures that are still coming down the pike. They're going to be around in San Diego County until, I would say, 2013. There's also a huge number of short sales that are coming because there's a lot of people who bought at the peak of the market. There's also a lot of people who refinanced and pulled their equity out at the peak of the market. So for – until the values in San Diego come back up to 2005 and 2006 levels, which is going to be, unfortunately, quite a while, anyone who needs to sell, they're being – their job is getting transferred, they're moving out of the city, they're getting divorced, they lost their job, whatever the reason is, they're going to be a short sale and short sales and foreclosures put a lot of downward pressure on real estate values. So I would say at the bottom of the market, yes, we're – we are kind of bouncing around the bottom, we're getting close to the bottom. The upper end, you know, we've got more to go, unfortunately. But the reality is, you know, we're not at the bottom. It doesn't mean that it's not a good time for a first time buyer to go out and buy because there's a lot of positive factors as well. Interest rates are low. You know, it's much more affordable, etcetera. But it's really just not accurate. I don't see how anyone can look at this market and look at all the data and say, you know, like – like I think the Association of Realtors said recently that, gee whiz, we're at the bottom and we're going to start rocketing up. It's just not accurate.

CAVANAUGH: I'm speaking with Matt Battiata and Gary London. They're my guests. We're talking about San Diego real estate and we're inviting you to become part of the conversation. 1-888-895-5727, 1-888-895-KPBS. Gary, I know that one of the things that you feel very strongly about is that there – residential property is not valued properly because of the distress that's in the market. Can you explain what you mean by that?

LONDON: Yes. And, you know, I sort of have to defer to my colleague, Matt, because he's on the ground doing deals every day and I'm just looking at the numbers and sort of looking at the 30,000 foot view. But my own sense is that we really don't know where we're at. I mean, we can speculate all day as to whether we're at the bottom, almost there or slogging along, and I have my own opinion on that as well. But I think what really is troubling about all these sort of statistics that we've been exposed to on the residential side is that they basically are based on distress sales. In other words, they're based on 'have to' sellers rather than 'want to' sellers. And when you're dealing with have to sellers, which is distress sellers, whether you're formally in foreclosure or just otherwise distressed, you're sort of by definition dealing with a factor that you're lowering the value. So all we're doing is measuring lowered value property. We really have no idea as to how low values are in San Diego because sales transactions are at – are still probably just above half of what they were during the healthy markets of 2002 to 2005. So until we get up to higher sales volumes, which would bring back in the want to sellers, the discretionary sellers, we don't really know how much values have dropped. So none of these numbers really mean anything.

CAVANAUGH: Would you agree with that, Matt?

BATTIATA: I think it's a really good point and I think that – that's my point, is that these have to sellers are going to be around for the next handful of years and so for that reason, unfortunately, you know, that's why we're not at the bottom because foreclosures put a lot of downward trend. You know, there's also a whole 'nother sector. You mentioned the shadow inventory. There's a tremendous number of homes in San Diego County that the banks have foreclosed on and are literally just sitting on and not selling, number one. Those are going to eventually have to come through the pipeline and go on the market. There's also a huge number of people that are in this limbo where they're trying to do loan modifications so that they can stay in their homes, and the reality is that, for the most part, the banks are not interested in doing any meaningful loan modifications. Now these people take six months to a year going back and forth with their lender trying to do this. Unfortunately, the majority of those people are going to end up being either a short sale, hopefully, or worse case, a foreclosure. So, you know, the only silver lining in all of this, I think, for San Diego County is that when we do get to the bottom, it is going to be an artificially low bottom, which is going to make it a huge opportunity for – not just for investors but for anyone that wants to buy a home in San Diego County. So…

CAVANAUGH: Right. Let's take a call. And Willie is calling from San Diego. Good morning, Willie. Welcome to These Days.

WILLIE (Caller, San Diego): Good morning. Good morning. Thanks for taking my call. Two quick questions. One, just wanted to see what the chances are of congress extending the first time homebuyer credit. I think that runs out November 30th. And then, two, the trade-ins why you guys are saying – I'm really concerned about this second wave of mortgage resets in the back half of 2010 and really in 2011 with the five year option on, what is it, 73% of those people that are underwater in their homes because this thing is going to go on for years. What are your thoughts on that as well.

CAVANAUGH: Well, let's take the first question first. What about that homebuyers tax credit. Do you think that'll be extended?

BATTIATA: I think – I really do think it will. As you remember, I went to Washington, D.C. back in January…

CAVANAUGH: Yes, I do remember.

BATTIATA: …and lobbied all of our California Representatives and Barney Frank's office and so forth. And I'm probably going to be making another trip this fall. And I do think it's a very strong possibility that that will be extended for probably another year. So that's good news.

CAVANAUGH: Exactly. You know, I – we're going to remember Willie's second question about those mortgage resets but we have to take a short break. And when we return, we'll be taking your calls and talking more about San Diego real estate. You're listening to These Days on KPBS.

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CAVANAUGH: Welcome back. I'm Maureen Cavanaugh. You're listening to These Days on KPBS. We're talking about what's good and what's bad about the present real estate market here in San Diego. My guests are real estate economist Gary London and realtor Matt Battiata, CEO of the Battiata Real Estate Group. And we're taking your calls at 1-888-895-5727. And we had a two-part caller, a question, a two-part question from a caller before the break, and the second half was about mortgage resets and you remember the question, right, Matt?

BATTIATA: Yeah, there's a – In the state of California alone, there's about $300 billion dollars in option ARM loans that are due to reset over the next 12 to 24 months. And an option ARM loan is a loan that starts out with a very – like a, you know, like a 1% payment, interest only payment. When – Once the balance – What's happened is the balance is actually increasing because you're not keeping up with the interest. It's a negAM loan. Once it gets up to either 115 or 125% of the original loan amount, it automatically resets to a regular amortizing loan, which means your payment could go from $2,000.00 a month to $5,000.00 a month very easily. So there's a huge number of those people – there's – this has been on 60 Minutes and a lot in the news. In California, there's about 300 billion dollars of those loans, a huge percentage of those people, over 50%, owe more on their home than their homes are worth and so when those loans reset and their payment goes way up, if their lenders are not willing to, you know, substantially modify their loans so they can afford them, a lot of these people, because they're upside down, are going to say, you know, what's the point? I can't afford it. Why am I staying here, etcetera. And for those people – You know, for anyone listening, you know, if you are in trouble with your loan, the – You know, be proactive. Don't leave it to the very end because what is killing our market and killing values in our neighborhoods are foreclosures. And so they do have options. They can do a short sale, etcetera, and avoid foreclosures, save their credit, so…

CAVANAUGH: And Gary.

LONDON: Well, I think in the most extreme of circumstances that Matt just articulated, he's – it's going to play out exactly how he has said. You're going to see people simply make the decision that it doesn't make sense to support the house. But I think it's important to be very careful not to assume that the experience that we've just had in the subprime area, which was first time buyers, people who shouldn't have qualified for a house at that point in their lives anyway, and they threw the house back. I don't believe that people at the higher end, the move-up levels of the home ownership system, are going to really act altogether the same way as the subprime people. In other words, the numbers are the numbers and Matt may be right. But my sense is that if the economy starts to improve and things start to fall in place, people will be in a position, unless they're in an extreme underwater situation on their loan, to have the desire to renegotiate their loan. Because here's what's going to happen: At some point, regardless of what letter of the alphabet you use to describe where we are in the economy today, whether it's we're going to see a recovery in a U-shape, a W or a V, at some point San Diego is going to be faced with a shortage of supply which will bid up prices, which will create – which will self-correct this situation that he's describing.

BATTIATA: Umm-hmm.

CAVANAUGH: Okay.

BATTIATA: Yeah, I agree with that.

CAVANAUGH: Okay, so we'll – we'll have to watch for that.

LONDON: Well, you have to agree with that; I'm the economist.

CAVANAUGH: Let's take some phone calls. A lot of people want to talk to you. Greg is calling from Point Loma. Good morning, Greg, and welcome to These Days.

GREG (Caller, Point Loma): Well, good morning. Thank you very much for having me on. Yeah, yeah, I was listening to both these fellows who are very well educated in this and I – I have wondered why the appraisal process in setting evaluations is sort of predetermined to predict failure rather than success. Why isn't it possible to establish, too, a way of throwing out the distressed properties when it comes to setting an evaluation for the neighborhood? And therefore taking away the natural plunging values that we've seen.

CAVANAUGH: Greg, Gary would like to address that.

LONDON: I think both of us would.

CAVANAUGH: Yeah.

LONDON: I live in Point Loma as well so I think I know the neighborhoods you're talking about. I mean, it's – it's a – The appraisal process is a debacle right now. I mean, the appraisers are doing exactly what Greg has said. They're basically looking at comps, the comps are reflecting distress sales; it's self-fulfilling that they're going to cause – be part of the process that cause values to go down. And it's a terrible problem that somehow has to be corrected. And it is affecting the – it is affecting sales, it's affecting the ability of agents to be able to close sales because appraisers are coming in low. The problem is, is that because there's only distress sales to go to as comps, that's what they have to go to. They're not employing other methodologies, which they could and they probably won't.

CAVANAUGH: And, Matt, should they employ…

BATTIATA: Yeah, I mean, it's very, very common that I'll talk with a seller and they say – I'll say, well, you know, this one sold for this and this, and they'll say, yeah, but those were foreclosures, you know…

CAVANAUGH: Umm-hmm.

BATTIATA: …and the banks, which is – That's the irony is that the banks are the ones behind this. They've, in my opinion, basically created what we're going through right now and they're actually killing the market because it is very common whether – you know, typically with a foreclosure, that you will see the bank put a property on the market for just – I mean, it's unbelievable how much lower they price these things at because they really don't know – they don't – they're not real estate companies and they don't know how to value real estate. So I think he makes a really excellent point. And it's true, when you have – I think Gary described it as a have to seller, you know, in a foreclosure, you would think the bank wants to get as much as possible but they simply do not know how to value real estate. And even in a short sale, it's very common the bank will approve a price of, say, $400,000.00 and what we do in our office is we bid that price up, you know, at – but most agents don't do that, believe it or not. The bank says four hundred and they say, great, here's four hundred. We bid the price up because the market is, nine times out of ten, willing to pay substantially more than what the bank approves, again, because the bank does not know how to value real estate. So I – That's a really excellent point that the caller made.

CAVANAUGH: Let's take another call. Jim is calling from San Diego. And good morning, Jim. Welcome to These Days.

JIM (Caller, San Diego): Yeah, hi. This question is for Gary. Hi, Gary. I think we know each other. I'm Jim Taylor. Anyway, I've got a question for you regarding the local commercial banks, regional banks, that have funded most of the mini-term loans on small office buildings, small strip centers, the one to ten million dollar loans that were put into place, say, between 2003 and 2006. Those are coming up for adjustment. At the same time, leases are coming up for renegotiation. Lease rates are down by 50%. Cap rates are up by 3 and 4 points from where they were in '05, and I see sort of a perfect storm that's going to be hitting in 2010 on the small commercial projects.

CAVANAUGH: Well, thank you for that. Sure, Jim, we'll talk about that. So, Gary, is that assessment correct, do you think?

LONDON: Yeah, I think it's entirely correct. I think the difference between the scenario that Jim just painted and the one that I sort of spoke to at the front end of the show is that when you're speaking to commercial properties, at a higher level you have institutional investors and more sophisticated investors or more well-capitalized investors involved in it so those sort of take the hit and go on. In the case of small properties like the kinds that Jim is talking about, I think that's where the rubber meets the road. I think we're going to see the same kind of playout of a downward spiral in values associated with those factors that he just described that we've seen in the residential sector. So I think that's going to be, from a buyer's perspective, that's going to be where the bargains are right now because there's really nothing the bank can do and nothing an owner can do. They're going to see the economics of the deals go down and there's going to be some bargains out there.

CAVANAUGH: Yeah.

BATTIATA: And, you know, most of those properties that the caller was referring to, they were bought with what we call SBA loans. In an SBA loan, the buyer puts down 10%…

CAVANAUGH: A small business…

BATTIATA: Yep, and then there's a five hundred – there's a 50% first and a 40% second because remember the buyer put 10% down. What's going to happen is a lot of these properties are worth about half of what they were worth at the peak, and so that second, which is the SB – the second is actually the SBA loan, is going to get pretty much wiped out. So it is – You know, the impact – One thing we haven't talked about is that what's coming in the commercial market, which is – it is a perfect storm, in my opinion. The impact – What we're not talking about is the impact that's going to have on the banking industry because not only are they going to take an unbelievable hit but they're not willing to lend money out to people to buy these distressed properties. So you've got, on the one hand, they've got these properties that they're basically going to have to foreclose on. They're trying – there's all – there's a whole special servicer situation going on which is very similar to the short sales with residential. They're completely overwhelmed just like residential short sales. They haven't hired enough people. And so there's a huge number of those but then again, there's no – the banks are basically, they're afraid to lend money out to buyers to buy these distressed properties. The only silver lining is that there is a tremendous amount of money waiting on the sidelines to jump into this market but they don't know – you know, they're hesitant to – as far as when to jump in. But the big issue is that, I believe, that our banking industry is going to need another bailout from the government.

CAVANAUGH: Well, let me ask you this because you bring up this point. I was going to ask what impact is this perfect storm, as you've been saying, in commercial real estate that's just about 12 months away, going to have on the overall real estate market in San Diego? And I think you've addressed that a little bit in that if it hits the banks, if the banks are overwhelmed, well, then residential real estate is going to be hit pretty badly.

BATTIATA: Well, there's – I mean, the residential real estate has been – I mean, it's – We are getting relatively close to the bottom, which is the good news. But there is hundreds—hundreds—of billions of dollars owed on these properties and the banks, you know, they don't want to take these back but, unfortunately, they're not equipped to do loan modification, to do short sales, and so, unfortunately, you know, it's really what – the same that's happened with the residential market. Unfortunately, I think the free market is going to play out. Commercial market's going to get extremely cheap here in San Diego. The only good news for us is that while on a nationwide basis, there was an article in the New York Times yesterday where they said that we're in the – between the first and the second inning in this whole commercial crisis. Here in San Diego, we're probably, you know, between the third and fourth inning. Just a little bit better.

CAVANAUGH: Gary.

LONDON: You know, I'm listening to Matt and while I substantially agree with him, I'm finding myself feeling a little bit more optimistic. I do believe that we are – that we're playing along the bottom of the market right now and I believe that there's a resiliency that our local market has that – that maybe a lot of other regions won't have or can't have. We're an economically diversified region. I think we're poised for growth. I think a lot of these problems will end up correcting themselves assuming we start to see recovery. I don't expect to see a sharp recovery but, like Matt, I expect to see that recovery here first. I think we're a little bit further along in the ballgame, too. And I think that some of these problems are going to correct themselves. I think we're going to see a lot of commercial buildings find new uses, other uses. I think there's going to be a lot of activity by builders and rehabbers in those areas. I think that we're going to see reoccupancy at a different economic equation. I think we under – we're going to understand the values in the commercial sector way more than we understand the residential sector because we have ways to measure income property values that we don't have…

CAVANAUGH: Ah.

LONDON: …in residential. So I think we'll have a better understanding of the market and I think we're probably going to see a sharper recovery there but I think we do have some pain in front of us.

BATTIATA: But I, you know, also, but I think that the commercial – I mean, I think that they are different markets. The commercial market is further away from a bot – the bottom than the residential market. But in response to what Gary just mentioned, is that, you know, it's the same – The thing is, though, it's the same valuation. In other words, commercial property in this scenario is going to be valued by comps, by what, you know, by what people are willing to pay. Yes, there are cap rates and so forth that factor in but when you've got a bulk of properties that are – that need to be disposed of, basically, and resold. You know, I was just talking to a friend of mine, who's a commercial broker here in San Diego, last night, and he was basically painting the picture that I'm painting right here on the air, which is that there's a huge number of properties and right now there's no buyers out there because they can't get financing.

CAVANAUGH: I really do want to get in a couple more calls. Wayne is calling from Normal Heights. Good morning, Wayne, and welcome to These Days.

WAYNE (Caller, Normal Heights): Yeah, good morning. I'm just wondering if there isn't a graveyard spiral that we're not recognizing, as they call it in aviation, here where you have the inducement of buyers by federal tax credits and these buyers are marginally qualified for the most part. And then they get into these mortgages and we have another collapse of the balloon because the properties continue to go down in value. They get into a similar trap, they lose their job, whatever, and this may prop up the real estate market for a while but I just wonder how these gentlemen see that.

CAVANAUGH: Well, thank you, Wayne. I think we've found someone who is a little bit more downhearted about this than you, Matt.

LONDON: He makes you sound like an optimist.

BATTIATA: Well, you know, the thing is, I am an op – I mean, I am an optimist. It's going – When we reach bottom, which we're not very far from it, I think…

CAVANAUGH: Right.

BATTIATA: …we're two years from the bottom, it's going to be a huge opportunity and I think that you'll see the median price in San Diego more than double, even triple over the next several years. So I think – I don't want to paint the picture that I'm so negative, I'm just a realist for the short term.

LONDON: Yeah, and you're on the ground and I respect that. I think that, you know, the caller basically gave us a 30 second recitation of history. I think what he described is what – sort of what we've already experienced and to a large context. I think that are we going to see a further negative spiral, well, none of us really know. But, you know, my sense is that if we do see some economic recovery, as I said, we're probably going to see it here first. It's probably going to catch us a little bit unaware. It'll probably recover in different ways. And real estate just follows what – You know, at this point, real – You know, all real estate is, is the space in which all human beings do their activities so if they're going to do more and different activities, the space is there is needed to be there to do it and the values will certainly reflect that.

CAVANAUGH: I want to end our conversation just with a little discussion about interest rates because I know that that is the one of the good things that's going on in the real estate market right now, is that interest rates are so low. And, Matt, what do you think? Will they – we see them trending up? Where are they going to go in…?

BATTIATA: I think for the immediate – I think they will stay low while the market is down and, like in past cycles, when the market starts to recover, typically, interest – and the economy starts to recover, typically interest rates track upward. You know, in the early nineties in San Diego County, you know, the market was dropping and interest rates were dropping with them. And then when the market started to recover, interest rates started to go up with them. And that's just a – you know, Gary, I'm sure, can speak to that. So I think that for the near future, while the market is sort of bouncing around the bottom or getting to the bottom, we're going to have – we're going to enjoy low interest rates which is great for buyers, obviously, and great for the market. And then as the market recovers, I think you're going to see interest rates track up and, you know, and, hopefully, not too high but that, again, that remains to be seen. And Gary could probably add…

LONDON: Yeah.

BATTIATA: …more to that.

LONDON: Well, no, I mean, I fundamentally agree with Matt. I would add that I don't think interest rates really are the issue. The issues are that we've ended the era – the stated income era, meaning that the so-called liar loans and people who could fog a mirror could get a loan. You know, I mean, essentially now we have to go back to basics, and it's going to be more than just about interest rates, it's going to be about can I prove my income? Do I have enough money to put down on a piece of property? The sort of fundamentals that for most of the last half of the 20th century most of us purchased houses observing those rules. I think we're going to go back to those rules and I think ultimately that's going to be a good thing for our market and will really help our recovery. Interest rates inevitably are going to go up but I don't think they're going to go up to such a level as to cause sort of a whole 'nother reason for concern.

CAVANAUGH: We have to leave it there, gentlemen. I want to thank you both so much for talking with us today. Gary London, real estate economist with London Group Realty Advisors, Gary, thanks a lot.

LONDON: My pleasure. Thank you.

CAVANAUGH: And Matt Battiata, CEO of the Battiata Real Estate Group. Thanks again, Matt

BATTIATA: Thank you, Maureen.

CAVANAUGH: And we will continue on These Days. I want to let you know there were so many people who called, if you would like to express your comments about this segment, go online, KPBS.org/TheseDays. And These Days continues in just a few minutes.

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CAVANAUGH: Welcome back. I'm Maureen Cavanaugh. You're listening to These Days on KPBS. Doing something a little different for the last half of this hour. Our guest for the Art of Photography is not available and Matt Battiata and Gary London have graciously consented to finish out the hour with us and so we will continue to take your calls about real estate in San Diego. 1-888-895-5727, is our number. And I want to formally introduce the guests again. Matt Battiata is CEO of the Battiata Real Estate Group, and Gary London, a real estate economist with the London Group Realty Advisors. And, you know, when we ended the segment just a few short minutes ago I know that guests always have something in their mind that they really wanted to get to when we end a segment. So I’m going to ask you first off is there something that you really wanted to say that we didn't get a chance to say in our earlier conversation?

LONDON: Well, we're both wiping the blood off from our fight in the hallway just now. No, I would say that what probably matters to me is to look forward. I mean, we know that we're bouncing along the bottom. We're almost there. We're there, maybe a little bit on our way back. Who knows?

CAVANAUGH: Right.

LONDON: What I think, what we both agree on is that it's going to be a long slugfest back. This is not a quick recovery. And I think it's important for your listeners to understand, that especially those who are a little bit older who were around during the 1990s, we had a recession that went from approximately, peak at '89 to recovery to about '96. It feels to me like we're probably in '93 right now. You know, we're right in the middle of that period. Even when we recover, it's not going to be all of a sudden the skies are going to part and values are going to jump up again…

CAVANAUGH: Right.

LONDON: …and things are going to be automatically better. Markets take a long time. It's like an aircraft carrier turning, it takes ten miles. It's going to take some time for this market to recover. So the – I think where we left this, from my perspective, is we didn't give advice. And the advice…

BATTIATA: Umm-hmm.

LONDON: …to someone that's owning a home, that owns a home right now that might be a 'want to' seller but not a 'have to' seller is they just have to hang on because the situation will get better for them. And, inevitably, if they have the staying power to hang on, the economy will improve, values will go up. At some point, values will go up very much higher again, probably to the 2004 or '05 levels in the not too far distant future. But we're measuring this recovery in years, not months.

BATTIATA: Umm-hmm.

CAVANAUGH: And I want to mention that we actually have a first time home buyer on the line who wants to ask a question, so let's get to her. Angie is calling from Carlsbad. I want to let you know before we take the call, though, that our number is 1-888-895-5727. And, Angie, welcome to These Days.

ANGIE (Caller, Carlsbad): Thank you.

CAVANAUGH: How can we help you?

ANGIE: Well, you know, I, myself, have been looking to get into the market since January and it's pretty tough. And just wondering what would – something that they might suggest I could do as a first time home buyer to make myself a little more attractive to them.

CAVANAUGH: Attractive to a lender?

ANGIE: To a len – Well, no, because I've got the pre-approval. I've – I'm trying to do everything the right way. I just – At this point it seems virtually impossible just to find something in an affordable rate.

CAVANAUGH: Okay, thank you, Angie.

BATTIATA: Well, I think, Angie, I think, number one, you should be patient. And, number two, you need – you really, in this market, you really need good representation because I'm sure what she's running into is whenever – I could just hear the frustration in her voice. Whenever she finds a property that she likes, there's ten offers on it. And that's, you know, that's the other thing. You know, when you ask what would we like to add from our last segment, it's a really active market. There's a lot of buyers out there. Angie, I'm sure, is finding that, you know, gee, if the market's supposed to be so horrible, and yet here I am, I'm one of 15 offers on every property I try to buy. So there are a lot of buyers out there and that's the good news. And there is FHA financing, which I'm sure, as a first time buyer what she's using. You know, the secret to real estate investing really is patience. And so, you know, she needs a good agent representing her, number one, and she just really – you know, she needs to be patient and she needs to be really proactive. But – Because there are deals out there and, you know, what I would just quickly want to add from our last segment is that while I know that I sound like I'm pessimistic, I'm actually very optimistic but I'm also – You know, I feel like my job is to give people, you know, the honest truth, which I don't feel agents a lot of times do about the real estate market. So, you know, the reality is this is San Diego. It's the greatest place, we all agree, in the country to live. And people are going to want to live here. There is going to be a shortage of housing. Prices are going to go up. And so, you know, advice out to people that are listening is, as I said earlier, if, you know, if you can hang on, you know, obviously, you should. And most – The sad thing is, most people do want to hang on. They don't want their homes to go to foreclosure. They don't want to have to do a short sell. They want to stay in their homes. But if you can't, be proactive and do not wait to the last minute because there are options.

CAVANAUGH: And we have another caller on the line. Barbara is calling from Golden Hill. Good morning, Barbara. Welcome to These Days.

BARBARA (Caller, Golden Hill): Oh, that's – that would be great, yes.

CAVANAUGH: Okay, Barbara, are you with us?

BARBARA: Okay, Elsa?

CAVANAUGH: Okay. All right. Let me just ask you, Gary, from what Matt said about not being pessimistic and so forth about this market, isn't it hard, though, really to keep up your sense of things when you realize in some areas, really, the prices have gone down almost 50%. I mean, the housing values have just collapsed. And do you find, even taking a realistic look at the market that there is – there are areas where people might, you know, really just say this just isn't coming back.

LONDON: Well, it is coming back. And property values have not collapsed 50%. They have in certain neighborhoods but we – I have a sense that values have not – you know, as we start to get into a more normalized market, which will be measured when we see higher levels of transaction activity in the county—and we're not there yet, we're not going to be there for awhile—we're going to see that when the dust settles, housing values have probably not collapsed. They probably have gone down significantly but not at the levels that we're hearing. I think that in certain neighborhoods, in many neighborhoods, in most neighborhoods, the activity levels are so low and that people just recognize intuitively that, you know, we've been through this before; it's a cycle…

CAVANAUGH: Umm-hmm.

LONDON: …okay? Cycles are defined by the fact that they go down then they go up again. You know, I – When people ask me my age, I never tell them my chronological age. I say I'm four cycles old. You know, in all – What does four cycles give you? It gives you wisdom, hopefully, certainly experience. And as a homeowner out there, it gives you perspective. You know, if you stay healthy and you're able to stay vertical and hang around for a while, this, too, will pass.

CAVANAUGH: Let's take another call. Kathy is calling from Encinitas. Good morning, Kathy. Welcome to These Days.

KATHY (Caller, Encinitas): Good morning, all.

CAVANAUGH: Hi.

KATHY: Hi. I had a question regarding short sales, specifically what are the implications of a short sale to a homeowner's credit rating? And, secondly, are there any income tax consequences of a short sale?

CAVANAUGH: Thank you for that.

BATTIATA: I can definitely answer that question. Yeah, they're – the deal with the short sales that in a short sale the bank agrees to settle the debt on a property which means, you know, in a true short sale you don't owe the bank any money, you're not signing a promissory note, there's not deficiency judgment, it's just a done deal, and the homeowner walks away. The short sale is reported on your credit as debt settled for less than the amount owed. That, believe it or not, does not have that great of an impact on your credit. The primary impact in a short sale on your credit comes from missed mortgage payments. Most people, when they do a short sale, will stop making their payments. If you have five or six months of missed mortgage payments on your credit, guess what? It can have a dramatic – I mean, it could drop your FICA score a hundred points or more. The truth, though, is that you do not need to stop making your payments when you do a short sale. That's a huge misconception. I've done hundreds of short sales for people who've never missed a payment and never been late on a payment and that dramatically minimizes the impact on your credit. There can be tax implications, just to answer the second part of the question, because a short sale is debt forgiveness. The bank agrees to forgive the debt. The IRS looks at debt forgiveness as income. They say, you know, you used to owe the bank a hundred grand, they forgave that, that's like you just made a hundred thousand dollars. If it is your primary residence, meaning you've lived in it two out of the last five years, and you had a purchase money loan, in other words, you did not pull cash out, and if you did pull cash out, you used that money to improve the property then, thanks to the Mortgage Tax Debt Forgiveness Act, you do not pay income taxes on a short sale.

CAVANAUGH: Umm…

BATTIATA: And because – Now, there was – That's your federal taxes. There was a state level Mortgage Tax Debt Forgiveness Act that covered your state income taxes. That expired the end of 2008. The good news in California is that if there's no state law dealing with a specific tax situation the California tax law tracks with federal law. So for right now, if you do a short sale on your primary residence, you didn't pull cash out or if you did, you put it back, you know, you used it to improve the property, the good news is even though you will still get a 1099-C from your lender, when you do your taxes you'll simply fill out that, you know, it was your primary residence, etcetera, and you pay no taxes on a short sale.

CAVANAUGH: I think we can squeeze in probably one more call. Julie is calling from Carmel Valley. And, Julie, welcome to These Days.

JULIE (Caller, Carmel Valley): Hi, there. Thank you. I just have a slightly unusual question. I have a girlfriend who has a early eighties-something year old mother and she has about three hundred and sixty, three sixty-five, three hundred and sixty – thousand dollars of equity into her home. And somehow, the way her loan was set up, she has to make a $137,000.00 balloon payment at the end. And, you know, obviously, not a lot of eighty year olds, you know, have the means to make the sort of large payment. And she sort of surprised her daughter with this and so her daughter's trying to get her refinanced. And I'm just kind of wondering, you know, who sets up a loan that someone would work their entire lives, pay the majority of the house but then, you know, have a final payment for an eighty year old like that that they can't handle. Wouldn't the bank then sort of say, well, thank you very much for working all your life, paying all of this, and then take the equity.

CAVANAUGH: Well, Julie…

JULIE: What can she do?

CAVANAUGH: Yeah, Julie, thank you for that question. Have either of you heard of something like this?

BATTIATA: No, I really haven't.

CAVANAUGH: Wow.

LONDON: This is a – This might be some kind of private money loan.

CAVANAUGH: Sort of like some sort of second loan…

BATTIATA: Yeah.

CAVANAUGH: …and with a balloon payment at the end?

BATTIATA: Yeah.

LONDON: She needs to get advice from an attorney.

BATTIATA: Yeah, she really – Yeah, I would agree.

CAVANAUGH: Right.

BATTIATA: Yeah.

CAVANAUGH: Because it didn't sound like a situation that would be correct.

BATTIATA: Or – or a – I mean, I can't imagine her daughter hasn't done this, but, I mean, I would say to go the, obviously, to the bank. Contact the bank that holds the loan, if it is a bank.

LONDON: But what it brings up, and I have an eighty-something year old mother also. You know, and I think that it does bring up this whole issue of, you know, making sure that we’re looking at all of our financial circumstances right now and double-checking what our elderly parents – what their status is.

CAVANAUGH: That's a good idea, yeah.

LONDON: I mean, that's a whole 'nother area.

CAVANAUGH: Yeah.

LONDON: Plus, the whole senior housing area is another topic for a radio program because…

CAVANAUGH: Umm.

LONDON: …we are very undersupplied in the senior housing area. I've been writing columns in my business journal column on this very topic. It's a serious topic. And this is just one of probably a bunch of stories that we could get into.

CAVANAUGH: Well, we – Oh, we only have a very little time left and I want to kind of get an idea just for like the next three months or the next – yeah, the next quarter, I wonder, are we still going to be seeing a lot of people wanting to buy but the inventory being really low?

BATTIATA: We are. There's a huge – But there are, you know, good or bad, there's a huge number of foreclosures that are going to be released by the banks over the next – really, over the next couple of years. But they're going to start to hit this fall. And so the inventory – we're at – we have only about 16,000 homes on the market in San Diego County right now, which is very low. I mean, relative to what we got up to, which was about 30,000, is low. Now remember, you know, when we were at the peak of the market, we had three or four thousand, so -- but, you know, like I say, there are buyers out there but inventory is definitely going to spike up, there's no question about it so you're going to see – And most of what you're going to see are going to be foreclosures released by the banks, and that's what's coming in the near future.

LONDON: Well, let me attack the question this way. I think it's a once in a lifetime opportunity to purchase a house and I don't think – that's a window that we're in right now and windows open and they shut.

BATTIATA: Umm-hmm.

LONDON: I don't think, as Matt has said, this window is going to shut in the near future but if you're in the market to buy a home, this is the time to be looking.

BATTIATA: Umm-hmm.

LONDON: Because we're going to get to a point in San Diego County where the inventory's even going to be lower and that will bid up values again.

BATTIATA: Yep.

CAVANAUGH: And then we have to leave it there. Hey, thanks for coming back in. I really appreciate it.

BATTIATA: Do you really want us to leave, Maureen? We can stay.

CAVANAUGH: I think this time you really can. Matt Battiata, CEO of the Battiata Real Estate Group, and Gary London, a real estate economist with London Group Realty Advisors. Thanks so much for both appearances on These Days. Stay with us. Hour two of These Days is coming up in just a few minutes.