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Jim Scott
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Rich Market, Poor Market 

Last year's market for Metro-homes priced over one million was indeed lackluster. The prospects for 2010 remain a mystery this early in the year, but I think matters will not change much. Business reporters, on the other hand, remind us on a regular basis that a wave of upscale house foreclosures is near at hand. They are partially correct; delinquencies are up but they do not always result in defaults. Still, it is reasonable to wonder if The Curse of Eastlake is about to be visited upon Del Mar.

 

This market has already shaken out most of the poseurs and parvenus. Beyond the numbers, the picture of this market segment is not as clear. It is more than a toxic brew of over-leveraged properties, income erosion, investment losses and declining net worth. Some people in this demographic are making a financial decision that it may be smarter to walk away from a home; they consider a foreclosure or short sale a strategic retreat. Others, for social and personal reasons, choose to keep their homes, even if there is no equity remaining. The common denominator is choice. 

Rookie homeowners in Eastlake and other less-expensive neighborhoods do not have the luxury to ruminate about the state of the world economy or the condition of their portfolios. Their choices are much more defined; they are either unable to make house payments or they choose not to financially struggle to hold on to a home with negative equity and grim prospects going forward. 

Sellers with financial choice just shrug off the data and hold their price. The market in Mission Hills illustrates this point. The average price per square foot there fell slightly in 2009, from $460 in January to $445 by year's end.  Inventory is close to historical norms but sales have been lackluster, running about 60% of the average over the past 36 years. In the Northside market, one-third of the sales last year were for over $1,000,000; 85% of the active market is priced over one-point two. There is a disconnect here and that is thinning the ranks of real estate agents. 

Buyers do have their way when other forces affect a seller. The usual suspects are death, divorce, job loss, and reverses in other investments. The lesson here is that it even during a crushing recession it is not always easy to get what you want at the price you want to pay. There is a difference between optional sellers and those who have been visited by one of the Four Horsemen noted above.

 

Buyers in these markets do not doubt the value of this real estate, the future desirability of better neighborhoods like Mission Hills, nor their own personal financial capability to meet a seller's price. They have larger concerns; forces beyond their control have roiled their financial worlds. They assume, for the most part, that prices may have more room on the downside than upside. It is a difficult argument to counter and I think that is one of the reasons sales have been low. Uncertainty about the world economy means hesitation at home. Uncertainty is the new normal.

Rates and Rebates and the Other Half

Two government housing rebate programs are set to expire this spring. They provide Federal subsidies for move-up and first time buyers. These schemes, along with low mortgage rates, have been credited for stabilizing the housing market. There is much worry that there will be a second tsunami of foreclosures, in lower and mid-level priced homes, once these programs expire. In addition there are growing bank inventories, actual and potential, that could depress the market in 2010 through 2011. No one is sure how the banks and Feds will want the second half of the crisis to play out but there is no question there has to be some resolution. There are simply too many homeowners in arrears to ignore yet mass foreclosures would surely bring about the much feared double-dip recession--or worse.

 

This Administration is leaning to a policy of kicking the can down the road. There are good reasons for this approach other than politics. Time and inflation have always been the friends of real estate and I see no reason why this will not be true in the future. There is a difference between structural deflation and a business cycle. Keeping banks and homeowners on life support may be expensive and not satisfy our urge to punish financial missteps, but it is the best of several poor choices. The President, The Fed and Congress know the deflation-wolf is still at the door. 

Fortunately for us, real estate is local. Remember two of the most compelling incentives to hold and acquire San Diego property; land use politics and population growth. This combination, along with the recession, means there will be a housing shortage in a few years. Then factor in the demand for steel, copper and concrete from India and China and the values for existing homes will have no place to go but up. Not at the rates of the recent past, but still highers. Holding on through this cycle, no matter the cost, is looking like the smarter strategic move.

  

 

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