Slowing Down In San Diego

LATimes (08.07.05), via Calculated Risk, and the followup:

"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 and sell it six months later for a tidy profit of $200,000. Flores, a self-described real estate 'flipper,' is trying to sell two condos. But neither has drawn an offer after being on the market for more than a month, even though he's willing to break even on one and reduce the price on the other." All Eyes on Home Market in San Diego

Flores says the easy-money days are over. "'It's getting trickier now,' said Flores, 30, who became a full-time property investor three years ago after a short career as a senior financial analyst for a movie studio. 'Everyone thinks this has peaked.'" Ahhh yes; the money quote: "Everyone thinks this has peaked." Inventory is rising because more owners are selling. The supply is now exceeding the demand. The "number of single-family houses and condos on the market [has doubled] from a year ago. Yet fewer are finding takers. Homes that a year or two ago sold virtually overnight — in many cases triggering bidding wars — are on the market for weeks." Why?

• Ravenous demand drove prices up. It's become too damned expensive. "(O)nly 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. By contrast, affordability statewide is 16%; nationwide, it is 50%."
• Too many risky loans in too many portfolios. Most buyers in San Diego "still use loans with an 'interest only' option, a type of adjustable rate mortgage in which borrowers need only pay interest in the first few years before the monthly payment mushrooms." When these buyers have to start paying principal too, the default rate will soar.
• Too many investors in the market. Like our friend Flores, if it even looks like things might slow down, they're much more likely to dump and run.

"'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 nobody knows how the market will react if there's an economic shock.'" This and more, coming to a neighborhood near you?