A Parallel Universe

Stevetn.jpgIf it sounds a bit strange, think about this. During the past week in the world of our little team, we met with clients seeking advice regarding the three  homes they purchased over the past two years with a 100% financing. The negative amortization is currently adding (collectively) approximately $3,000 a month to their debt, which already exceeds the value of each of their homes. At the same time, one of our buyer agents represented a client in the successful purchase of a bank-owned property – that had multiple offers. This after missing on another property that also had multiple offers. Concurrently, we took a nice higher end listing, priced it aggressivley to the high side and still sold it with, you guessed it, multiple offers. Whew! What a strange week!

So, what’s going on here?

I have been following real estate trends in San Diego since 1979 and I have not seen anything like the current market. Dichotomy is an understatement. We are, like many other agents, seeing more clients/homes that are in financial trouble (primarily due to overleveraging, teaser rates, interest only and/or negative amortization loans), but at the same time seeing robust buyer activity.  Homes priced correctly and presented well are selling briskly, many with multiple offers.

Yes, the number of sales and the prices have come down over the past two years, but nothing like the 1989 – 1996 debacle where we saw prices drop 20% or more in many neighborhoods.

What we currently have is a real estate version of a parallel universe. The downturn in pricing being a combination of a natural evolution of the real estate cycle, made worse by the loose mortgage lending practices of the past several years and the misguidance of buyers, agents and/or lenders.

Contrast this with the fact that we are still enjoying an interest rate environment that seems to defy gravity. Employment growth in San Diego remains stable. Although sales are down from previous years, one must not lose sight of the fact that those “previous years”, particularly 2003-2005 posted record numbers of sales and now we are back to a level more in line with historical averages.

I must say, it is more than a little strange to be working on multiple transactions that are simultaneously representative of a pretty decent market and one that is sadly distressed.

So what is the forecast for the relative near term future? Sunny and warm or turbulent storms? A case can be made for both.

Right now, the saving grace is interest rates, still relatively low and the fact that the economy has not fallen into a recession. But storm clouds can appear quickly out of knowhere. If China decides, for example, to shift their massive currency investment into something other than U.S. Goverment Treasuries, all bets are off because the days of moderate mortgage interest rates will be gone. Ironically, the China investment here is due to the massive profits they are making on their exports to us – All the stuff we buy from them. If China shifts away from purchasing U.S. Treasuries, she risks taking away the favorable financing that is driving a ton of U.S. consumer spending to buy their products (thus generating the money they put back into our Treasuries). Almost and incestual relationship when you think about it.

The other potential storm factor is the recession scenario. The last one was short-lived in 2003. But we are close to entering an election year, so to the degree the FED can avoid bumping up interest rates, they will. The question is, will other economic factors such as a slow down in employment, reduced GDP, inflationary pressures, etc. send us down the slippery slope? 

For the moment,  I think the forecast is partly cloudy, meaning that one should remain objective and cautious in their real estate investments  in San Diego. Prices are still healthy and demand is stable, just not frantic like the 2004-2005 timeframe. As anticlimactic as this sounds, it is consistent with what Kris and I have been saying for the past two years – Be prudent, invest for the long term, do not overleverage and resist budget creep in your purchase. Hopefully the sun will keep warming our souls. 

The long term out look remains good. There just isn’t much of a supply of land left to develop in San Diego County, yet the demand will remain and continue to grow, notwithstanding the current slowdown. It may take up to another year of filtering through the bad loans and unfortunate purchases but, as history has shown us many times, we will re-establish a base and move on.

Sadly, the reality is there will be more owners who will incur extreme difficulties and hardships over the next year. We can’t stress enough the need to seek strong advisors to help you as early as possible.

I don’t like this Parallel Universe thing.

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