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Los Angeles Times All Eyes on Home Market in San Diego By Annette Haddad Times Staff Writer Sun Aug 7, 7:55 AM ET SAN DIEGO When the housing market here was red-hot 18 months ago, Alex Flores could buy a downtown condominium with as little as $5,000 down an d sell it six months later for a tidy profit of $200,000.
Flores, a self-described real estate "flipper," is trying to sell two con dos. But neither has drawn an offer after being on the market for more t han a month, even though he's willing to break even on one and reduce th e price on the other. "It's getting trickier now," said Flores, 30, who became a full-time prop erty investor three years ago after a short career as a senior financial analyst for a movie studio. Once Southern California's hottest real estate market, San Diego is feeli ng a real estate slowdown. It's a trend also starting to be seen in othe r regions, such as Las Vegas, Denver, Boston and Washington, DC Dramatic rises in home prices, particularly on the West and East coasts, have sparked a nationwide debate about whether the housing market is eng ulfed in a bubble that is about to burst. Those who believe the market is about to implode say San Diego's cooling could be among th e first signs of a pronounced downturn or even a possible crash in Calif ornia. But housing industry leaders say the slowing in San Diego reflect s the normal damping of a sizzling market that made millionaires out of many homeowners and investors. Because San Diego was the region's hottes t market, it's not surprising that it's one of the first to simmer down and return to more normal conditions, they say. John Karevoll, chief analyst at DataQuick Information Services in La Joll a, which tracks home prices, called San Diego "our statistical canary in the mine shaft." "It is further along in the current cycle, and what happens there could p redict what will happen elsewhere," he said. After more than doubling in the last five years, jumping almost 30% in on e 12-month period, San Diego-area home prices are rising more modestly 63% on a year-over-year basis as of June. Amid concern that prices may be peaking, more homeowners are selling, dou bling the number of single-family houses and condos on the market from a year ago. Homes that a year or two ago so ld virtually overnight in many cases triggering bidding wars are on the market for weeks. Homeowners such as John Kemper are finding additional windfalls harder to come by. Kemper figures his town home in Rancho Bernardo, a suburban community in the northern part of the city, surged about 50% in value since he bought it new two years ago. Seeking a bigger house for his five kids under ag e 8, Kemper put the unit on the market early last month at an asking pri ce of $624,975. But it's competing against about a dozen others for sale in the neighborh ood. With a dearth of offers, many sellers have set price ranges instead of a fixed listing price. "I have lowered the price and am the lowest in the neighborhood," he said , comparing his unit to others of the same style and size. Other once-torrid markets are also catching a slight chill. The pace of h ome price increases in Los Angeles, Orange and Ventura counties is becom ing more sluggish, although not as much as in San Diego.
These markets, like most of California, enjoyed huge price increases than ks to a strong economy, persistently low mortgage rates and the growing use of loans that let buyers squeeze into homes with far less than the t raditional 20% down payment. Five and a half years ago, San Diego ignited California's housing boom and to a large extent the nation's when home prices started rising by at least 10% year over year. It didn't hurt that San Diego was enjoying a downtown renaissance, showca sed by its new Petco Park baseball stadium, and a surge in jobs in its k ey industries of biotech, defense and healthcare. "Five years ago, few people would have considered living there, but now they're fighting to get in." Demand elsewhere in San Diego County also helped drive sales to record le vels. And the seemingly relentless escalation in prices gave homeowners a feeling of wealth. All you have to do is be here and own a place," said San Diego-based financial advisor Christopher Van Slyke. Now, several factors could cause a more pronounced slowdown here, analyst s say. By one measure, only 9% of households can afford the area's $493,000 median home price the level at which half of all homes sold for more, half for less. San Diego has been a stan dout in the use of unconventional lending. And the maj ority of buyers in San Diego still use loans with an "interest only" opt ion, a type of adjustable rate mortgage in which borrowers need only pay interest in the first few years before the monthly payment mushrooms. Yet another risk stems from the higher than normal level of activity by i nvestors. They accounted for 14% of all San Diego-area home buyers in Ju ne, versus the historical average of 11%, according to DataQuick. All of this unnerves many economists, who see a recipe for possible price declines in San Diego and elsewhere. They expect investors will start u nloading properties when they see their returns diminish. Many holders o f riskier mortgages, already stretching to meet their monthly payments, could default when their loans reset at higher rates in the next few yea rs. Mortgage insurance company PMI Group has pegged San Diego as the nation's third-riskiest market, with a 53% chance of home prices dropping in the next two years. Only Boston and New York's Long Island rank higher on the company's risk index. "Those of us with long enough memories know that real estate is cyclical, " said Mark Milner, PMI's senior vice president and chief risk officer. "But we've never seen a cycle with so many of these kinds of loans, so no body knows how the market will react if there's an economic shock." Although San Diego add ed 20,000 jobs between June 2004 and this June, the biggest gains were i n jobs related to real estate, such as construction, according to Hanley Wood Market Intelligence, a research firm. Analysts say a deflating housing market could reverse that trend, much as a contraction in the aerospace industry touched off a Southern Californ ia housing market downturn in the early 1990s. San Diego home prices wer e virtually flat for six years. The signs of a possible repeat performance are increasing. "Houses that would have sold easily a year, a year and a half ago won't s ell so easily now," said Parham Firouzi, a real estate agent in Rancho B ernardo. "There's a lot more negotiating going on, and buyers aren't goi ng over the asking price." And, he said, it takes an average of about six weeks to close a deal on a single-family home, double what it took a year ago. For instance, new-home dev elopments in the coastal city of Carlsbad were selling houses at a rate of six or seven a month a year ago. Today, they are still selling out, b ut at a slower pace of about four or five a month. Noon, of DR Horton, said his company's sales pace had slowed, particula rly among downtown condos, as price increases slowed dramatically since their peak in early 2004. Still, Horton's homes "are selling plenty fast ," he said. "It shows that the market has reached more of a balance" between supply and demand. Alan Gin, an economics professor at UC San Diego, said a crash is unlikel y, predicting that the region will continue to create jobs at a healthy pace, which will support demand for housing. Still, he said, many new jo bs are in the lower-wage category. "What you've got here is a slowing situation and not much of a chance of a severe downturn," he said. "To have a downturn, you need a triggering event, such as massive job loss." Investor Flores, who says he made close to $1 million in the last three y ears buying and selling new condominiums in downtown San Diego, is branc hing out to markets he considers undervalued, such as Houston. He's stil l investing in San Diego, but with a longer-term view. He recently put a down payment on a new downtown condo that won't be ready until 2008. "I'm still betting on San Diego," Flores sai...
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