For San Diego Real Estate, the Skies Are Not So Sunny

For a long time, this was a cruel place for any would-be homeowner who didn’t have a wad of bucks or a tolerance for the high-risk, short-term mortgages that some call suicide loans.

Finally, the seemingly unstoppable ascent of real estate here has stopped. Last week, reports showed that the city’s median home price dropped 1% in June from a year earlier, the first decline in a decade.

That should be good news for Carmen Buck, a 29-year-old homemaker who has been saving and hoping for a house. But she sees little to celebrate.

“Homes were more in reach a year ago,” Buck said.

Prices might have been a bit higher back then, she noted, but interest rates were a whole lot lower.

The long-awaited shift in the market’s direction isn’t pleasing many others, either. Sellers are chopping prices to get deals done. Buyers worry that values will continue to fall, putting their investment at risk. There’s widespread uncertainty, and some anxiety, about what happens next.

San Diego had the wildest run-up among major California cities, with prices tripling since the mid-1990s. The boom was stoked by cheap loans, changes in tax law, creative financing and a generalized mania that fed upon itself.

The market also began to fade first in San Diego. The craziness seemed to peak about two years ago, when bidders routinely submitted letters saying that they and their children would be forever honored if the seller would consent to choose them.

Whatever happens here, optimists and pessimists agree, will happen later in the rest of the state.

That’s about the only thing everyone agrees on. The size of the coming hangover is a particularly contentious matter.

Most analysts and people in the real estate industry insist it will be mild. The housing bears say the bulls are either misguided, uninformed or shills.

At a Century 21 sales office in the Ocean Beach neighborhood, broker David Davis said the market had already bottomed out. The spring was weak, he acknowledged, averaging only one or two sales a month -- half the office’s usual rate.

But things are already back on track, Davis said. He expects four sales this month, about normal.

The last San Diego real estate collapse, which hit in the early 1990s, was triggered by convulsions in the aerospace industry. The post-Cold War downturn caused widespread unemployment and a generalized exodus from much of Southern California. High interest rates contributed to the misery.

“Our No. 1 industry is now tourism,” Davis said. “Unless they take away the sun, we’ll be fine.”

He’s putting his money where his optimism is, spending $187,000 over the winter for a downtown condo he’ll live in. He knows other agents who are buying too. “I think they see a good thing,” he said. “Buy low, sell high.”

If Davis radiates cheer, the fliers taped to the window outside the office door tell a different story. “Huge Price Reduction,” one says. Another says both “Reduced” and “$15,000 Credit.”

In some cases, the prices are dropping faster than the fliers can be reprinted.

A two-bedroom town home has its price of $324,900 crossed out with a marking pen, replaced by $309,900. Another house, a four-bedroom in suburban La Mesa, has a printed price of $575,000.

Below that is handwritten $549,000.

Scribbled below that is a new minimum: $499,000.

What helped supercharge the San Diego boom was the spread of unconventional financing methods.

Some adjustable-rate loans allowed buyers to postpone payments on the principal. Sometimes the loans allow the buyer to pay only part of the interest, tacking the remainder onto the loan itself.

The advantage of these loans is that buyers can afford much more house. The disadvantage is that they reset quickly, which is why critics call them suicide loans. After the grace period expires, the payments can skyrocket -- particularly if it is a time of rising interest rates like the present.

Holders of these loans can’t afford to see prices decline. Yet for everyone who has been shut out of the market, the only hope is a drastic slide.

“Houses really need to fall by 50% to become affordable again,” said Tom Scott, executive director of the San Diego Housing Federation, a coalition of nonprofit and advocacy groups. “It would be better for everyone if the price of housing fell.”

Buck, the homemaker, said she and her electrician husband, Andre, might start looking at foreclosures. Notices of default, the precursor to foreclosure, reached 1,533 in San Diego County in the first quarter of 2006, up 60% from the year-earlier period, according to DataQuick Information Systems. The number is still low by historical standards, however.

Rich Toscano, a former technology consultant who was recently hired at a financial planning firm, expects the Bucks to have many more repossessed homes to choose from soon.

Two years ago, Toscano set up a website, www.piggington.com, to illustrate the case for a crash with facts, charts and dispassionate analysis. His work has won avid fans, many of whom post on the Piggington chat boards, and some detractors, who call him a bitter renter.

“We’ve built a whole economy based on selling each other homes,” the 35-year-old Toscano said. “That’s not sustainable.”

To illustrate his point, he offered a tour of downtown in his silver Miata convertible. Around every corner, it seemed, was another crane putting up another massive condo building. There’s Vantage Pointe, Smart Corner, the Alta, Nexus, the Legend, the Mark. Many will have hundreds of units.

“I’m surprised we haven’t covered all of San Diego with granite countertops by now,” he said.

The housing category dropping the most in value here, DataQuick says, are newly built single-family homes and new condos. Median prices of these are down 8% since June 2005.

Condos for resale are down much less -- 2.1% -- but sales volume has slumped by about a third. “There’s an 11-month supply on the market downtown,” Toscano said.

Many of the resales are offered by speculators. Buying condos to “flip” them was a routine practice here and for a while an extremely profitable one.

As is true of all booms, many expected the good times to continue forever.

“In 2004, if you told people that housing would someday stop appreciating, they’d look at you like you were the equivalent of a nut who was buying gold bullion and storing it in his bomb shelter,” Toscano said.

Another element manias have in common is that their logic is elusive. The record low interest rates, unconventional financing techniques and tax revisions allowing home sellers to keep the first $250,000 of profit tax-free were present in Nebraska as well as California, but Nebraska didn’t get crazy.

Other oft-cited reasons are dismissed by Toscano. There hasn’t been a population explosion in San Diego. Starting in 2003, in fact, the city lost more residents to other areas than it gained in newcomers.

Toscano says that the decline he is forecasting won’t happen overnight.

When he extends the tour through a number of residential neighborhoods, what’s most striking is not the presence of “For Sale” signs but their absence. “We’re at the very, very beginning of this,” he said.

The dream of homeownership won’t easily die. That could provide a steadying influence to a market in turmoil.

Eduardo Duarte is 36. He makes $30,000 a year working in a grocery store. His dream: a two-bedroom condo, which would have enough space for him and his young son.

It’s almost within reach. He’s saved and scrimped for two years and has just been approved for low-income housing assistance.

“When you rent, you don’t have anything,” Duarte said. “When you buy, you get tax breaks. And then you can sell the house and get the equity.”

What about all the forecasts of doom?

“After five years, houses should be going up again,” he said. “You’ve got to be patient.”