A condo-market meltdown has put the dream of owning a piece of downtown San Diego within the reach of more Valley residents.

Tightening credit and pain caused by rising payments on subprime loans have put the brakes on new-condo sales, sending prices plummeting and strapped buyers running for the exits.

While still lofty, prices for some units are now more than 30 percent below previous highs and still falling.

A new 725-square-foot "bank-owned" studio, two blocks from the San Diego Padres' ballpark, is listed at $189,900, down from $289,900 at the end of September.

"Prices are at least starting to make sense," said Stanley Paul Cook, a former Phoenix resident who is now a San Diego real-estate consultant.

He noted that real-estate speculation over the past few years pushed average San Diego home prices near $700,000, making it one of the nation's most expensive housing markets.

But the deals probably won't last. Construction of new condos has dramatically slowed, and when the existing units are sold, prices are expected to creep up. After all, it is San Diego, still one of the country's most desirable places to live.

Falling mortgage rates and a possible increase in the size of loans that can be sold to government-backed agencies also could help jump-start the stalled market. And there is increasing interest from foreign buyers who get an additional discount due to the weak dollar.

But for now, terms like "short sale" and "lender-owned" have become the bywords of the real-estate market downtown, along with "desperate" and "make offer."

Lockboxes for real-estate agents cover railings outside buildings. Inside, residents come home to find foreclosure notices on their neighbors' doors.

Tiny 'treasures'

The building boom, spurred by an aggressive downtown redevelopment effort and the construction of the Padres' Petco Park, brought thousands of new condominium units to downtown San Diego in the past few years.

Real-estate speculators fueled the frenzy, flipping (selling, often before taking occupancy) properties from building to building while creating an artificial demand that sent prices through the roof. "The market was so good and prices were going up so fast that we were oblivious to any kind of a peak," said Ken Baer, an agent with Willis Allen Real Estate in San Diego. "We knew things were high but thought they would keep going up."

Unit 211 in Discovery at Cortez Hill, for example, sold in 2002 for $409,000 and in 2004 for $699,000. The unit sold to a Phoenix couple in December for $470,000.

Downtown, there are more than 1,000 condominiums on the market in a roughly 125-block area. That is up from 700 last year and 500 in 2005.

Of the 1,000 units, about 400 are in new buildings that are just being completed.

Most of the others have been built within the past few years, and many, bought by speculators, have never been lived in.

They are generally small. One-bedroom and studio units, some under 500 square feet, make up the largest category of unsold condos on the market.

"An entry-level condo that sold for $400,000 a year ago is practically impossible to sell at that price in this market," said San Diego real- estate agent Mark Mills. As a result, prices are dropping fast for the small condos, and many are landing in foreclosure.

Some frustrated owners, now struggling to sell their properties, blame the developers for building so many small units.

But with the high cost of land and construction, Mills noted the tiny condos were the only way some developers could make their projects make economic sense.

The Centre City Development Corp., a non-profit agency that is spearheading the redevelopment of downtown San Diego, reported that the agency has assisted in the development of 7,200 condominium units in more than 50 projects downtown since 2001.

That has helped push the downtown population to 30,000 from about 10,000 at the start of 2000. Another 60,000 are forecast to move downtown, bringing the population to 90,000 by 2030.

"You can't beat it. Everything is close by," said Gary Smith, a longtime downtown resident and president of the Downtown San Diego Residents Group. "You drive to the golf course on weekends but walk to everything else."

Although new construction has fallen off dramatically, more than 1,300 units are expected to be completed in the next two years. Thousands more have been approved and are waiting to be built.

Converted to hotels

While some condo projects are being abandoned or put on hold, others are being reinvented as hotels, apartment houses and office buildings.

"Before, they were all condominiums," said Sherm Harmer, chairman of the Downtown Residential Marketing Alliance, which promotes downtown housing. "Now, it's a mix."

The Centre City Development Corp. plans to use the lull in condo construction to catch up on infrastructure improvements. That includes the development of 10 new parks, a new public library and waterfront improvements, among other projects.

Upside down

The downtown condo market peaked in late 2006 when sales slowed and prices started to fall.

"Everything went into the crapper the same time I bought this place," Vern Scholl said of his 1,550-square-foot penthouse in the Park Place complex downtown. Scholl paid $1.9 million for the unit in 2006 and had been trying to sell it ever since. He originally asked $2.3 million but was trying to negotiate a short sale for $1.65 million prior to its sale for $1.5 million at a January foreclosure sale.

"What do you do when you owe more than it's worth?" he said.

Lew Breeze, a number cruncher and real-estate agent, estimates that there were 20 foreclosure properties on the market a year ago and now there are more than 100. There are even more short-sale deals.

A short sale occurs when a lender agrees to take a loss on the sale of a property in order to avoid the foreclosure process and the possibility of a greater loss.

Short sales also allow owners to get out from under properties they can't afford without incurring the stigma of foreclosure.

An Aqua Vista penthouse that sold for $2.1 million in 2004 is now on the market as a short sale for $1.2 million.

Turnaround ahead

A slowdown in new construction eventually is expected to lead to a short supply, particularly if a ramp-up in new construction lags behind the falling supply of units.

Baer added that foreign investors, particularly from Canada, are beginning to snap up the units, gaining deeper discounts with the declining value of the dollar.

He believes there is also considerable pent-up demand out there from people who have always wanted to live in San Diego but were put off by the high prices.

While sellers scramble, civic officials remain pragmatic about the situation.

Barbara Kaiser, vice president of real-estate operations for San Diego's Centre City Development Corp., said the city is still processing design review and zoning changes for new residential projects.

"People are positioning themselves for the next boom," Kaiser said.

Max Jarman
The Arizona Republic
Feb. 9, 2008 10:24 PM