San Diego Real Estate Bubble - Down thru 2010

Top San Diego Mortgage Broker - Opinion on our real estate market

Waaay too many "investors" were in the market, many of whom have no investing experience, nor the cash reserves to handle vacancies or repairs. i think the downtown condo market will get really really soft (maybe 30%+ decrease in prices over the next few years) due to this very reason.

Mortgage money has become way too easy. many MANY clients took out arms and interest only loans (i saw one estimate that 81% of loans in sd county in 05). in addition, many of the loans were "stated income" loans. this is because the people WOULD NOT QUALIFY if they had to based on actual reported income.

The actual amount of $$ spent out of pocket (down payment and closing costs) was LESS in 2004 than in 1998. this is because in 1998, many 1st time home buyers used fha loans, and still made a 3% down payment and paid some or all of their own cloisng costs. in 2004, most 1st time buyers were 0 down, stated income.
i believe (and we are starting to see it) that lenders will tighten their guidelines on credit score, etc. this combined with increasing interest rates will take buyers out of the market.

Market sentiment has changed. buyers are no longer worried about getting in "now" before prices get out of reach. buyers are aware that if they wait, they may have more to choose from, and potentially at lower prices.

Ultimately, two things drive purchasers of property for investment.

#1 is cash flow and #2 is appreciation. The "smart money" has not been buying investment prop in sd for a couple of years or more. Obviously the idea of buying a property in sd county as a rental and receiving a positive cash flow is unlikely as is the idea of any great level of appreciation over the next few years.

Two things also drive the purchasers of property for primary residence.

#1 is income. household income in sd county went from about 56k in 2000 to 60 k in 2005. not exactly a formula that would translate to a doubling of home prices (can you say "speculation" anyone?).

In fact, based on 60k annual income, you have monthly income of $5,000 a month. Prudent underwriting guidelines would dictate that no more than a 3rd or so if gross monthly income go to housing. If we push this to even 40%, we are talking about a 2000 monthly house payment. try getting a payment like that (including taxes and ins) on the "typical" 600k house in sd. It doesn't take a rocket scientist to see the writing on the wall.

#2 thing is the comparable rental market. If a renter is paying $1,500 a month for rent, and can buy a prop for a $2,000 month payment, it can be justified with a Fed income tax write off and so on. However, right now, avg rents are $1,500 or less and avg payments for the "median" 600k house on even an int only arm (with no neg am) are well over $3,000 even with a 10% down payment (that most 1st time home buyers do not have).

No soft landing in my opinion. I think that prices will erode through at least 2010. if lending rules are not eased (esp for very high ltv loans) we could see a TON for foreclosures.
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