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After disappointing first half, experts see better finish for 2011 economy

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Six months into 2011, the sense of cautious economic optimism that emerged in the winter and faded in the spring is beginning to pick up again.

In the general economy and the stock market, experts are hopeful that 2011 will end up resembling the year they thought it would be. The same can't be said of the housing market.

Recent economic indicators suggest the spate of negative news in the spring was transitory, largely the result of supply disruptions from the Japanese tsunami, oil price spikes from unrest in the Middle East and mounting concerns over the Greek debt crisis.

"The economy rarely moves in a straight line," said Lynn Reaser, chief economist at the Fermanian Business and Economic Institute at Point Loma Nazarene University. "It now looks like this was a temporary soft patch."

Generally, the national economic performance has been a tale of two quarters.

Early in the year, hiring looked to be picking up and the stock market was rallying to recent highs. But most economic indicators turned sour, leading economists to question their expectations of 2011 being a vast improvement over 2010.

Signs are now pointing to a second half of the year that looks a bit more like the 2011 that was expected at the onset.

"Economic indicators are picking up, which is food for the stock market, which lifts consumer sentiment," Reaser said.

Companies have learned to do more with less in the years since recession-forced layoffs, and small businesses remain wary of the strength of the recovery. But Reaser said she still expects to see the unemployment rate fall in the final months of the year.

San Diego particularly is outpacing both the state and the nation as a whole, she said, and she's edged upward her expectation for countywide job creation, from 18,000 to between 25,000 and 30,000.

The local economy benefits from strength in the defense, biotech, tourism, telecom and health services segments, according to Reaser.

"We should be optimistic, but we aren't an island," she said. "We can't ignore what's going on in the rest of the state and nation."

By the end of the year, rising interest rates and lowering unemployment rates will indicate that the economy is indeed improving, Reaser said. The slow recovery is just part of the economic cycle.

"In downturns caused by crises, the recovery is slower in the aftermath," she said.

The housing market has been largely without good news this year. According to the S&P/Case-Shiller Home Price Index, home values have fallen in most of the nation's markets, with many reaching all-time lows.

However, Clear Capital's Home Data Index through the year's midpoint shows home prices to have grown 0.9 percent in the second quarter, after nine months of consecutive decline.

Clear Capital called San Diego the eighth best performing market in the country through the first half of the year and expects it to remain a bright point for the next six months at least.

The company observed a 2.1 percent decline in prices in San Diego from January through June but expects that to decelerate to a fall of 0.8 percent over the next six months.

Home buying activity has been unable to recover from the expiration of the federal government's homebuyers' tax credit last year, and distressed properties continue to represent more than a quarter of all homes sold.

Though at a historical high, the percent of the market that is real estate owned is tending downward. According to Clear Capital, the U.S. real estate owned saturation rate at the end of the second quarter is 31.4 percent, down from 33.1 percent at the end of the first quarter.

Michael Lea, director of the Corky McMillin Center for Real Estate at San Diego State University, said the amount of negative equity present in the market would continue to prevent significant improvement in the near term.

Developers have little incentive to build new homes given the difficulty of competing with low-priced distressed units, according to Lea.

As long as that's the case, the housing market will be unable to lead the way out of the recovery, as it's done in the past.

"Now, you can't build for the cost of production," he said. "There's no incentive to build, which is the powerful job creation that housing can provide."

Lea said he'd like to see decreases in defaults and the backlog of distressed properties over the next six months. If that happens, he'd expect prices to begin to stabilize and perhaps begin a slight upward trend.

"Without it, we'll see a slight price decline," he said.

But the biggest change coming to residential real estate in the remainder of the year is the scheduled reduction in the maximum allowed size of loans eligible for backing from the Federal Housing Administration and Fannie Mae and Freddie Mac.

On Sept. 30, the size of a conforming loan in San Diego County is scheduled to decline $151,250, from $697,500 to $546,250.

Lea said the change would cause interest rates to increase at the upper end of the market.

Commercial real estate locally is developing into a bifurcated market, according to Lea. Well-located, class-A properties are commanding cap rates that compare to those in the middle of the last decade. The rest of the market remains depressed.

Without improvements in employment, the commercial real estate market doesn't have much room to generate forward momentum, he said.

Bud Leedom, publisher of the "California Stock Report," said health care stocks rallied early in the year, a historically bad sign for the market, but have since tapered off.

Genomics stocks were San Diego's big winners in the first half of the year, according to Leedom.

"(Genomics) should be the next frontier of investing opportunities as we look to sequencing human genomes," he said. "San Diego has a number of companies that play in that space, so it should be exciting for us."

Illumina (Nasdaq: ILMN), Mitek (OTC: MITK) and Life Technologies Corp. (Nasdaq: LIFE) are some of Leedom's top picks.

He also said Qualcomm (Nasdaq: QCOM) is well positioned to transition its success from the 3G era to the 4G era, as it owns a number of 4G patents.

"San Diego is positioning away from being a boom and bust town," he said. "It's not a quarter biotech firms anymore."

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