These days, someone talking about a double-dip isn’t ordering ice cream. A double-dip is the dolorous possibility that the economy will slump again, after staging a very modest, government-goosed recovery from the worst downturn since the Great Depression. It’s possible that any double-dip will only affect housing. But in the worst-case scenario, another housing crash could lead the entire economy into the tank again.
Warning: San Diego is not immune. It’s true that home prices in San Francisco, San Diego, San Jose, and Los Angeles, although coming back only moderately, have done better than prices in most of the rest of the country. However, as we will see below, part of that is a statistical mirage. Also, there are some suggestions that home values in the California coastal metro areas are dropping again, an indication that the country could fall into that housing double-dip.
First, the backdrop. Nationally, new and existing home sales are plunging, even though mortgage rates have been pushed to record lows. However, Standard & Poor’s/Case-Shiller numbers indicate that home values in the 20 largest markets rose 1 percent in June from May and 4.2 percent from a year earlier. San Francisco and San Diego recorded the best annual gains, and Los Angeles came in fourth, although their June growth rates were down sharply from their May advances.
San Diego’s home-price recovery isn’t quite what it seems, say economists. “The mix of sales has changed dramatically,” says Alan Nevin, director of economic research of MarketPointe Realty Advisors. “When we had our first big round of sales, they tended to be the cheapest homes — say, foreclosures for $100,000. But now we’re not getting as many foreclosures,” and higher-priced homes are a larger percentage of sales, lifting the average prices.
San Diego home sales plunged 19.4 percent in July compared with a year ago, according to data from MDA DataQuick, but prices went up 5.6 percent. Says Nevin, “I suspect that resales this year won’t be as ebullient as last year because of the falloff in foreclosures.”
New York City’s Radar Logic has tracked this phenomenon statistically. From June of last year to June of this year, San Diego home prices went up 5.7 percent. But a year ago, sales of foreclosed homes were 33 percent of all sales. Now they are running 27 percent. Actually, if you drop out homes sold by banks (foreclosures), San Diego prices declined by 1.4 percent over the 12 months that ended in June, says Quinn Eddins, director of research. The same was true in San Francisco and San Jose.
Ominously, between May and June of this year, the average of all San Diego prices declined by 0.9 percent, according to Radar Logic numbers, which don’t jibe with Standard & Poor’s calculations. “Normally, the percentage goes up that time of year,” says Eddins. “This shows us there is underlying weakness. San Diego and the other California markets tend to be bellwethers for our composite of 25 municipal areas. We are seeing price declines earlier than usual.”
Eddins thinks that the data from Standard & Poor’s/Case-Shiller is misleadingly optimistic, and actually, so do the economists who put out those numbers. The Standard & Poor’s numbers include transactions occurring over a three-month period. Hence, they still reflect the positive effect of the federal stimulus program. Once the effect of that stimulus disappears from the statistics, prices could flatten or retreat, say those compiling the S&P/Case-Shiller numbers.
Eddins fears that weak demand and rising supply may lead to a housing double-dip across the nation. “The home-building industry is an important source of employment, particularly in Southern California,” says Eddins. “The fact that home prices are dropping doesn’t suggest home builders will ramp up production. People are still deeply underwater.” (That is, there is more debt on their homes than they are worth.)
San Diegan Robert Campbell, who publishes The Campbell Real Estate Timing Letter, computes a “Real Estate Crash Index.” In August of 2005, his index correctly flashed a sell signal on San Diego real estate. In May of this year, the index flashed a buy. But he doesn’t think the good days will last long. “It is really getting scary in San Diego,” says Campbell. “San Diego is one of the three strongest markets [in the United States], but it is losing momentum. The recovery was artificial, driven by government stimulus. There was a temporary bounce in the market, but it will start heading down.”
There are stark differences among neighborhoods, says Nevin. “From Carmel Valley all the way to Carlsbad, home prices didn’t even drop 10 percent,” he says, while at one point countywide prices were down more than 40 percent. They are still down 34.6 percent from the late-2005 peak. “In eastern Chula Vista, prices dropped 50 percent.” Around the county, vacancy rates in single-family rental homes are 1 or 2 percent: “People are buying foreclosed homes and renting them out,” he says.
Oceanside’s Hanley Group follows new home sales in 115 development tracts throughout the county. “Sales dropped like a stone in mid-June and haven’t come back,” says Sharon Hanley, who heads the company. Now there are 1.25 home sales per month in those 115 tracts; back in the halcyon days of 2004 to early 2006, sales were running at 7 a month. “I wouldn’t look for any comeback until after the first of the year; then it will be very, very limited,” she says. She sees some strength in the Carmel Valley, La Costa, and Oceanside areas and very moderate activity in South Bay, but weakness in East County, where there isn’t much on the market.
“It is slow,” says Peter Reeb of Reeb Development Consulting. However, he feels, “We have seen the worst of it. I don’t think there will be a double-dip in the new home market.” New home prices dropped 30 percent from peak to trough, but certain factors indicate sales won’t start dropping again. “The supply of housing is at its lowest level in over 30 years. On a project-by-project basis, sales have been rising for more than a year. In the second quarter of this year, prices were up 1.5 percent. This creates a sense of urgency among buyers. The sense of urgency and scarcity provides support for the market.”
But if that sense of urgency evaporates, San Diego could be in for trouble. A mild housing downdraft might not do much damage, but a second drop of 10 to 20 percent could lead to a double-dip in the overall economy.