On One Hand

I am writing this in September of 2011  a time when we are being barraged by doom and gloom from all sides. So what better time to write about what s coming for San Diego because it is really quite exciting!   

Background: At the risk of oversimplifying, the reason values are down in San Diego (and yes, they may go down further) is that San Diego is not exempt from the worldwide recession/credit crunch.

Here's what happened: In the run up to the crash in 2008 there was an excess of cash in the economy (excess liquidity) which means that if banks only lent to credit worthy borrowers (not just home buyers but also corporations and governmental entities) they would be left with too much cash on which they would be receiving no return nor would they be able to generate loan commissions. So, they lowered the bar and started lending to non-creditworthy borrowers. This of course caused the crash of 2008. Now the pendulum has swung the other way. Whereas prior to 2008 they were stupidly lending, now they are stupidly not lending (except when absolutely forced to on solid gold deals). Meanwhile, large corporations and financial institutions are hoarding cash like never before. The consensus among the sources I have checked is that the number is somewhere in excess of $13 Trillion. That is nearly the size of the U.S. Federal deficit! This combination of extremely tight credit and hoarding of cash is strangling the economy.

Here' s what will happen: While we don t know how long this credit crunch/cash hoarding will last, we do know that it won t last forever. At some point the $13 Trillion will start to flow and the credit pendulum will get back to the middle ground. Optimistic economists say this will be in 2014/15 - after the presidential election. Pessimistic economists say that it will be more like 2018/19. When this happens we will begin to pull out of the recession. This will launch San Diego s time in the sun!

Four reasons why San Diego will out perform most other regions of the country when it comes to real estate values: 

• San Diego County is built out! This happened at the same time the crash happened in 2008 which is one reason why most San Diegans aren't aware of this game changing fact: There are no more parcels of raw land large enough to build more subdivisions. This means that San Diego is no longer a developing county. It is a redeveloping county. This means that in order to add new housing stock, we must knock down low-density housing and replace it with high-density housing. Whereas the pipeline for making raw land habitable is 10 years, the pipeline for redeveloping low density housing is decades long.

• San Diego County has a housing shortage! Approximately 20,000 families with at least one family member who works in the county cannot live in the county not because they can t afford it but because THE HOUSING DOES NOT EXIST! These workers live in Riverside County, Imperial County, and Tijuana. The vacancy rate is as close to zero as it can get and the apartment market is the only  Seller s Market  of all the real estate sub markets. To make things worse (or better depending on your point of view) the housing shortage will get worse at the rate of 10,000 units per year for the foreseeable future due to population growth and the good outlook for job growth in San Diego County, which brings us to the third reason

• San Diego County is number 6 or 7 in the nation in terms of our attractiveness to high tech business  especially Telecommunications, Biotech, high tech defense contractors. And then there s our old ace in the hole.... The best weather in the world! All regions of the country are being strangled by the credit crunch/cash hoarding. But only San Diego became recently built out AND has a growing housing shortage AND is attractive to high tech companies AND has the best weather in the world. This is why values will rise more quickly and to a higher level as soon as the credit crunch/cash hoarding eases.

Three ways to capitalize on this amazing confluence of mega-trends in San Diego:

• Buy as much of the best San Diego real estate as you possibly can! Right now is the best buying opportunity in San Diego since the Korean War. We are in the good ole days right now. This is the time people will tell stories about decades from now  stories about how incredibly cheap things were in 2011-2013  or stories about how they wish they had bought during that time.

• If you are thinking of cashing out of your San Diego real estate, DON'T! Hold on to it and rent it out (the rental market is very strong due to 1 and 2 above). Time solves everything in real estate. If this isn t possible for you  if you must sell because you are out of time - call me!

•  On the other hand, if you have equity and would like to relinquish your current property in order to acquire a better San Diego property this would be a perfect time to do it since interest rates are so low. Obviously you will have to accept a disappointing price on your current property but you will more than make up for it on your replacement property.

 Sources: My main sources are Economists Alan Nevin and Gary London.    

The best way for most people is to first determine whether the project is feasible WITHOUT falling in love with any particular house. If it is feasible then you put your current house on the market SUBJECT TO SELLER OBTAINING SUITABLE HOUSING. When you get an acceptable offer you negotiate a 2 week "Looking Period." If you find an acceptable house in that period then both houses can be put on the same closing schedule allowing you to move out the day before your buyer moves in. If you don’t find a suitable house within 2 weeks, you request another 2 weeks from your buyer or they may cancel – buyer’s choice. I once had a situation like this that extended 2 weeks at a time from mid August to Thanksgiving before the right house came on the market. If the buyer does choose to cancel, the house goes back on the market and you sit patiently until you get another buyer. NOTE: I have described this process in common language but this is actually done in writing as part of a carefully written purchase agreement.

There are other ways to solve the problem none of which work as well (or at all) for most people:

 

• You can move twice. Sell your house, move to a rental, and then move into your new house when you find the right one. The advantage is that you retain maximum negotiating power both as a buyer and as a seller. The disadvantages are that you have to move twice and you are selling your house without knowing exactly which house will replace it.

 

 

• You may be able to get a "Swing Loan" aka "Interim Loan". The advantage of this is that it makes some of your equity available for your purchase. The disadvantages are that you don’t get all of your equity out, loan fees are expensive, and you are still left with a vacant house to sell. Can be risky.

 

 

• You can put the cart before the horse by falling in love with a house, put an offer in on it contingent upon you selling your current house. The only advantage is the emotional comfort of falling in love with your next house before you let go of your old house. The disadvantages are: most sellers won’t even entertain an offer contingent on selling another house, it trashes out your purchasing power (in the event that the seller would entertain such an offer), and it trashes out your negotiating power as a seller.

 

 

• You can liquidate investments to fund the purchase and then replace the cash when the old house sells.

 

 

• A wealthy friend or family member can act as the bank for interim financing.

 

In terms of your negotiating power and your stress level, the worst thing you can do it to fall in love with the new house first. If you find yourself in this regrettable situation (sometimes life just happens) you will need a seasoned agent more than ever. And under no circumstances should it be the agent representing the seller of the house you want to buy (See my earlier blog about how to choose an agent).

The short answer is right after you choose your agent (see my blog ).

Getting pre-qualified means speaking with a Loan Officer about your income and expenses and job history and credit rating and available cash. The Loan Officer then tells you what your maximum purchasing price is and what your closing costs will be.

Getting pre-approved means all of that plus the Loan Officer independently verifies your employment, credit rating, expenses, and cash. At the end of this process you will receive a Pre-approval Letter which will accompany any offer you submit.

Don’t even bother with getting a pre-qualification. No competent agent puts any faith in them and you need to know what your top number is – no ifs, ands, or buts. This is one way we keep you stress level down and your negotiating position strong. This can mean that you get a highly sought after property and the other buyer doesn’t – or that your offer is taken more seriously. I’ve seen multiple offer cases in which the higher offer didn’t get the property because the other agent didn’t "sell" his buyer as well – didn’t make a strong enough case that his buyer is the kind of buyer who you won’t regret being in escrow with. Having a really credible pre-approval letter is central to leveraging your power to the max.

On a related point, don’t switch lenders midstream. This totally trashes out your credibility in the transaction. You should pick your lender as carefully as you pick your agent. Most Loan Officers aren’t that competent/ethical – just like Realtors. Pick the lender based on past performance, professionalism, connections, and references. Do not pick your lender based on rate and point quotes. Doing so sets you up to be "blue skied". When you pick the right lender you will get the best available rate and points.

First, select the best possible agent. Shop for the agent first and THEN shop for the house. Some of the reasons for doing things in this sequence are:

•     This is one of the most important decisions you will ever make. It is way more than a financial decision. This is the place that will launch you in to the rest of your life. This is the place that will “charge your batteries” after a long hard day. This is the place you will raise your family or enjoy your golden years. This is where lifelong memories will be made. There is one place that will accomplish all this better than the rest.  You need an agent who will underwrite the quality of your decision – not one who “sells” you a house.

•     The real estate industry doesn’t do anything to protect the public from inept and/or unethical agents. The barrier to entry into the profession is very low. It is harder to get licensed as a hair stylist than it is to get a real estate license. Virtually all agents are Realtors so that offers no protection. The fact that an agent is with a large respectable company offers no protection.  The fact that a given agent does a lot of business in a particular neighborhood does not necessarily afford you protection. The consumer of real estate services is literally thrown to the wolves when it comes to discerning which agent is really good at underwriting the quality of your decision. The general public thinks that one agent is pretty much interchangeable with any other agent. This could not be farther from the truth. I estimate that no more than 5% of agents have mastered the profession.

•     The house hunting process is very stressful. An excellent agent will make sure you only invest energy in looking at homes that are relevant to your search criteria.

•     You make your money in real estate when you buy. You receive it when you sell. But if you buy right then the whole time you own the property life is better.  It just stands to reason that you want the best possible advice and the best possible negotiator at the time you are making the most important decision during the whole time you will own the property. 

•     When you are satisfied that you have the best agent, tell him/her that you will remain loyal during the house hunting process. This frees your agent to serve and advise you in terms of your best interest. A good agent will move heaven and earth for a loyal client. An agent who doesn’t have your loyalty may be tempted to pressure you to buy this house now.