A leaking balloon, the threat of recession, and the eternal mystery of the Federal Reserve System have real estate insiders pondering the coming year with a mix of hope and anxiety.
David Cabot, the new president of the San Diego Association of Realtors and the broker of record for Carmel Valley-based Prudential California Realty, predicts that local housing prices will remain stable.
“There is nothing on the horizon that says that interest rates will go up dramatically,” he said. “By April, my guess is that you will see more and more people who want to sell.”
While more units are likely to be sold in 2007, he added, “It probably will be 2008 before we see a dramatic change. It’s a good time to buy, but there is a lack of consumer confidence, which is not at the same level as a year ago, and this drives the real estate market.”
The number of homes sold in San Diego County dipped by more than 24 percent in November, compared with the previous year, while the median price sank by almost 7 percent to $482,000, according to a DataQuick Information Systems report released Dec. 13.
Tony Pauker, regional president of Olson Co., a Seal Beach-based urban homebuilder, and chairman of the Urban Land Institute, San Diego/Tijuana District Council, agreed.
“Is this a good or bad time to buy a house?” he asked. “It’s not bad economically, but it is emotionally.”
That will be changing during the first half of 2007, said Pauker, when people get “fed up” and decide to take the plunge.
His other predictions: Buying incentives will go away, there will be fewer resales on the market by midyear, and “the price of land is going to need to go down a lot.”
As for those who climbed on the real estate bandwagon during the flush times of an overheated market, hoping to turn a quick buck, “That is over,” said Pauker. “That market will not come back for a long time , maybe not for 10 years.”
While the second half of 2007 will provide “stability,” he said, “don’t expect any kind of quick turnaround.”
Interest rates, as usual, will be a determining factor in how goes the real estate industry.
Marney Cox, chief economist for the San Diego Association of Governments, a regional planning agency, believes that there is “a probability of rates increasing.”
“It’s a tough call to make now,” Cox added.
Any major boost in interest rates by the Federal Reserve would “wreak havoc,” he said, while a decrease would boost the market, and “put a lot of people back in,” encouraging home buying.
Another probability, he said, is a recession in 2007.
“We are right on the edge,” said Cox.
Home prices will probably stabilize, he added.
“There is a weakness,” he said. “But there is no bubble, just the air being let out of the balloon slowly, as opposed to a pop.”
But that leaking balloon is discouraging owners from taking advantage of the equity in their homes, said Cox, leading to a decline in sales and product purchases.
Steve Doyle, president of San Diego-based homebuilder Brookfield Homes, is expecting a “cautiously optimistic year.”
“I hope that what we’re going to see through 2007 is a stabilization of the market,” he said. “That we finally got all four wheels on the ground for a soft landing and we’re ready to move ahead.”
But there are many variables.
“We don’t know where interest rates are going to go,” said Doyle. “If home mortgage rates take off, it can turn things negative very quickly.”
Sellers should enjoy a good year in the perennially high-end market of Rancho Santa Fe. In November, the tony community recorded the highest median price for single-family detached homes in North County, $2.7 million, according to the North San Diego County Association of Realtors.
According to Diane Cox, a sales representative who specializes in the Rancho Santa Fe area for First American Title Co. in downtown San Diego and California Title Co. in Mission Valley, this group doesn’t have to sell at all. They either want to maximize their investment when the market is hot, or move into a different home in Rancho Santa Fe.
“Given these facts, it would not be unreasonable to expect inventory levels to decrease over the next year, as sellers decide to stay for the long haul, and wait until the next upturn to sell,” she said.
Good news for sellers, because, “while they do not have to adjust their price expectations to the imbalance of the marketplace, they will not have to slash their pricing far below historic levels,” said Diane Cox. “As both buyers and sellers adjust their pricing expectations, we should see a steady flow of continued sales in 2007.”
Joe Graham, president and broker/owner of La Jolla-based Westland Group/Westland Properties, sees “things firming up, especially in the million-dollar residential market.”
While 20 percent appreciation might be excessive, “You should have a fair return and a reasonable expectation,” he said about prices. “One marketplace that will suffer is condo conversions. That was a bandwagon that a lot of people jumped on, paying twice what those places were worth.”
Not Permitting Growth
With the commercial real estate market in a slowdown mode, there is a reduction in the number of building permits being issued for both multifamily and single-family projects, according to Alan Nevin, director of economic research for MarketPointe Realty Advisors in San Diego, which provides market analysis to real estate professionals and businesses in Southern California.
In this century, he said, 2003 represented the peak year of activity, topping out at 18,300 units. Since then, the permits have steadily declined.
Some data: In 2006, permits totaled 12,000, down one-third from that 2003 high. In 2006, there were about 5,000 single-family units permitted and 7,000 multifamily units.
“In 2007, we see the single-family production matching that of 2006, but the multifamily side declining to 6,000 units,” said Nevin.
That decline is the result of a lack of rental product under construction and a fallback in downtown vertical construction, he said.
“On balance, the local economy is healthy and growing,” he said. “The basic structure that creates real estate demand is still there, but buyers are taking a wait-and-see attitude. The resale market is down about one-third as well, and prospective buyers of new homes are concerned about their ability to sell their existing homes at rational prices.”
Don Conley, a salesman with Prudential California Realty in Carmel Valley, has seen a lot of ebbs and flows during his 35 years in the real estate business.
“What’s happening now is definitely not what we had in the early ’90s, with high unemployment and high interest rates,” he said. “There is more variety in the economy today, and we have grown in the diversification of our businesses.”
“2007 should be a good market,” he said. “Is it going to be spectacular? No. Will there be an oversupply? I don’t think so. There will be more of a normal supply of properties on the market.”
But Conley quickly noted that 2006 also was a good year, when you consider averages, and not the “spectacular” years that San Diego County recently experienced.
“I’ve had a pretty good year,” he said in December. “You have to work a little harder, it takes more time, and you have to spend a little more money on advertising. You have to be a salesperson.”