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Expert Insights: Residential real estate

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Mark Goldman has 30 years of real estate finance experience. He is a Certified Mortgage Planning Specialist (CMPS), and obtained the Certified Commercial Investment Member (CCIM) designation for commercial real estate consultation in 1989. He has been a top producing residential mortgage broker in San Diego since 1991. He is currently a senior loan officer with Cobalt Financial Corp. In addition, Goldman teaches real estate investments and finance to undergraduate students at San Diego State University. He has written training materials and text books on real estate investment analysis and finance.

How would you characterize the San Diego real estate market, particularly in comparison to the national market? Are we in for any more price declines, even in certain pockets?

I believe the market is currently stabilizing at lower pricing levels. We may see a few bumps in the road until economic recovery has stabilized. I do not expect any significant value appreciation in the near future (one to three years). Prices have been fairly stable during the past three months. However, inventories are accumulating.

MLS inventory (16,707 for single family detached and condos as of July 12) has not been this high since October 2008. This may be the “shadow inventory” catching the market after the expiration of the homebuyer tax credit stimulus, which probably presold some demand. This increase in inventory occurs as affordability has improved, interest rates are at historic lows and employment has improved very slightly in San Diego. I would advise speculators to be very cautious in this market and focus on cash flow for their return, in contrast to value appreciation, to contribute to their returns.

Anecdotally, a few of the fix and flip investors that I know have experienced longer marketing times and slightly disappointing sale prices. Case?Schiller has measured a year-over-year increase of over 11 percent for our market area. I believe we may be somewhat overbought and prices are currently softening a bit. A bit of the price softening may be attributed to the elimination of the homebuyer tax credit.

Mark Goldman

Financing -- the good, bad and ugly. The good: Interest rates are very low. More jumbo financing is working its way back into the market, which will help higher priced listings to move. The bad: Consumer confidence is in decline, so consumers are perhaps less inclined to sign onto a 30?year mortgage. The ugly: Lending requirements for income documentation and property requirements are excruciating. Many self?employed borrowers, who relied on stated income loans, no longer have access to home loans.

Are you worried about REO levels and shadow inventory and how they will affect the broader market? Why or why not?

There is increasing pressure on banks to move on their loans that are in default. So, they are more inclined to pursue foreclosures. But, they are also motivated to consider more efficient short sales, and deeds in lieu of foreclosure to mitigate their potential losses. Loan modifications have not been working for borrowers or banks for a wide variety of reasons, including bad faith, poor implementation and the lack of motivation to write down principal balances. Prime loans are now the highest portion of defaulting loans. So REO will be increasing. Investors seem to have been overbidding on distressed property. I expect these factors to contribute to more inventory and softening of prices for the next 12 months or so. I expect the impact to be somewhat gradual. This cloud will remain on our market until the values increase.

About one-third of homes in San Diego are upside down, compared to about one-fourth nationwide. I suggest this is a major motivator for defaults in our market that will exacerbate the problem. When values exceed mortgage balances, borrowers can sell their property. I would hope lenders become more effective in closing on short sales to ameliorate this problem. Certainly employment and household income contribute to the number of mortgage defaults. As long as default rates are high, property values will be stressed downward.

What gives you hope in residential real estate? What still worries you?

My concerns for our market are employment, declining household income, poor lender performance in resolving defaulted loans and a very jittery mortgage lending environment. Fear creates paralysis.

Buyers seek “great deals” or do nothing. Lenders are reluctant to fund loans. Small business owners do not have access to capital to operate their businesses, let alone expand and hire more people. Many small-business owners are stressed with the reduction of bank financing plus their home equity lines and credit card limits have been hampered. Since most job creation comes from small businesses, this will stress economic growth.

In the long run, I am very optimistic about our future. We have had challenges in the past and overcome obstacles. In the late ‘80s and early ‘90s we experienced the “peace dividend,” which cost San Diego a great number of defense jobs. But, our economy evolved to high-tech industries. Our business community abounds with very capable entrepreneurs who will adapt to evolving opportunities and redeploy our economics assets, including our labor force.

San Diego has a severe shortage of housing units. The natural growth of our population will cause a doubling of our population in the next score years. These people must live somewhere, whether they rent or own their homes. San Diego employment is already growing at a pace slightly greater than the state of California, which speaks to our economic resilience. A recovery will come, and we will have a lot of catching up to do. Capital markets will find a new equilibrium and serve the market in business and housing. That is opportunity.

Fortunes will be made in this market by those who properly interpret the opportunities and challenges.

-- Compiled by Rebecca Go

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