Drive through California's sprawling inland suburbs and you'll spot the familiar mileposts of a real estate bust: foreclosure signs, brown lawns and abandoned subdivisions.
To see the damage in downtown San Diego, walk a few blocks. Then look straight up.
There you'll see hundreds of unsold luxury condominiums stacked in vacant high-rises. Some units downtown are now selling for less than half what earlier buyers had paid during the market peak.
These see-through buildings, with names evoking European sophistication like Aria and Vantage Pointe, are the opulent spatter from the bursting of one of California's flashiest housing bubbles.
From 2001 through 2008, more than 8,000 condominium units were built in downtown San Diego. That's double the number of downtown units constructed over the same period in Los Angeles, a city three times its size. So while sales of urban high-rise units are convulsing elsewhere, nowhere is the collapse more dramatic than in downtown San Diego.
Flush with easy credit, developers and home buyers were eager to invest in "America's finest city," the nickname used by officials to tout San Diego's bay-side location and perfect climate.
At the height of the frenzy, hopeful purchasers queued up outside sales offices to plunk down deposits. There were occasional arguments over who was first in line. No one wanted to miss out with condo values riding an elevator to the sky.
Near the peak, in May 2004, median resale prices of downtown condos hit $647,500, a 56% increase in just three years, according to San Diego research firm MDA DataQuick.
One savvy flipper made a $91,000 profit in less than two months in 2005 by reselling a 560-square-foot studio for $340,000.
"There was a little bit of a mass hysteria mentality. . . . People thought they would be priced out of the market," said Bradford Willis, 47, who signed a contract in 2004 to purchase a $341,000, one-bedroom condo in a planned luxury development. Willis said he bought on speculation because there was little existing inventory on the market at the time, much of it priced above $500,000.
Irrational exuberance has long since given way to buyer's remorse. Median resale prices for downtown units stood at $370,000 in June. That pricey 560-square-foot studio? It was foreclosed and resold this year for $162,000, down more than half from its 2005 sale price.
Downtown San Diego, a 2.2-square-mile area, is now awash in condos. About 400 new and occupied ones are listed for sale, and more than 450 are in some stage of foreclosure and will eventually be put on the market. An additional 1,000 units that were under construction when the market soured are slated to be completed this year, adding to the glut and putting further downward pressure on prices.
So far this year, 159 new homes have been sold downtown, according to DataQuick. At that pace, it would take several years to sell all the units recently completed or being finished this year. Developers are holding units off the market.
Some companies have simply walked away. Los Angeles housing developer KB Home abandoned plans for a 184-unit luxury project in 2007, before construction began. The new owners of that downtown parcel are now building 226 units for low-income families.
"It was like the Gold Rush down there, and this is the fallout," said Peter Navarro, a UC Irvine professor of economics and public policy who in 1992 ran unsuccessfully for mayor of San Diego.
The same factors that led to overbuilding everywhere, such as loose credit and false expectations of ever-rising prices, were at work in San Diego, Navarro said.
Still, there were some unique forces pumping air into the bubble.
Canadian developers with little experience in Southern California, starting with Nat Bosa, a prominent Vancouver, Canada, condo builder, led the condo charge downtown, overestimating its potential, experts said. Buyers likewise bet too heavily on the urban revival triggered by the 2004 completion of the Petco Park baseball stadium, home to the San Diego Padres.
City policies encouraged multi-unit housing development in the lightly populated downtown area, where large projects could be built with little community resistance. Builders loved high-rise towers because they could sell more units on the same space.
But that almost exclusive focus on upscale high-rises was a mistake, said Howard Blackson, who heads a San Diego urban design firm. Towers aren't as attractive to families as other types of housing, such as row houses or smaller, walk-up buildings, Blackson said. Nor were they affordable for many. With some three-bedroom units priced at more than $1 million, the pool of purchasers was limited.
"They became opulent second homes for very, very wealthy people," Blackson said, "and there really aren't that many of those buyers to go around."
Tough new lending rules aren't helping matters. Fannie Mae and Freddie Mac, the government-sponsored entities that buy or guarantee the majority of new mortgages, require a new housing project to be 70% pre-sold for a home buyer to get a loan. That makes it virtually impossible for buyers to get mortgages in largely vacant buildings, even if they have great credit.
Rather than dump units at fire-sale prices, some developers are converting their projects to rentals, at least until the market improves.
Among them is Pointe of View Developments. The Calgary, Canada, company in May began refunding deposits to about 300 buyers, including Willis, who had signed contracts to buy units in a downtown project known as Vantage Pointe. The leviathan 42-story complex, with 678 condominiums and ground-floor retail space, is slated to open this month as a rental building while the developer awaits state approval to divide the building into smaller phases.
That legal adjustment will make it easier for the project to meet Fannie Mae and Freddie Mac rules, said Brian Stoddard, president of Pointe of View. He hopes eventually to put the units on the market at prices ranging from $300,000 to $1 million.
Whether he'll get those prices remains to be seen. Many of the former buyers, including Willis, are glad that they won't be moving in. They count themselves lucky to have escaped contracts for units now probably worth substantially less than what they agreed to pay five years ago.
"I'm relieved I got my deposit back," Willis said.
People priced out of San Diego during the bubble market may also emerge winners, said designer Blackson, because lower prices will open up the possibility of downtown living to a wider variety of residents.
"Maybe some of my friends will be able to live there instead of having to go to Tijuana or Temecula," he said. "We had a housing [affordability] crisis; did we inadvertently solve it on the backs of developers gone broke?"
The real shame, some real estate veterans said, is that San Diego should have seen it coming. A spurt of condo development in the early 1990s put hundreds of unwanted units on the market. It too was a spectacular crash.
No one knows better than Michael Berg, a.k.a. "the Naked Guy." From 1993 to 1995, Berg was the only resident of the 41-story twin-tower One Harbor Drive condominium complex. The project had gone bankrupt, and Berg was the only buyer to move in.
He became a local legend after the hometown newspaper, the San Diego Union-Tribune, printed a front-page feature on his luxurious existence. The lawyer confided he sometimes took the trash out in the nude, since no one was around.
Eventually, the building filled up and Berg was elected president of the homeowners association. Now 54, Berg sold his condo last year and moved to the suburbs.
Berg said the recklessness behind the current crisis was as bare and brazen as his old garbage runs.
"It's greed," he said. "People are always quick to look the other way when they think there's money to be made."