I was a guest this morning on “These Days” with host Maureen Cavanaugh on 89.5 FM KPBS radio, along with San Diego Union Tribune real estate reporter Roger Showley. We will be posting an audio clip of the show on the “In the News” section of Battiata.com shortly.

On the show this morning we discussed the January San Diego sales data that shows a 7.6 % decrease in the median price for San Diego County, and took calls from listeners.

The big debate in the media and among real estate “experts” and pundits continues to be “Are we at the bottom of the market in San Diego?” – and most seem to think we are, pointing to the increase in the median price for the last few months, up until January anyway. Those who maintain this position discount the January sales stats by saying January is always a slow month and that we cannot draw any conclusions from one month, especially January etc.

The irony here is that when we saw a .75% (that’s right, less than 1%) increase in the median price in August 2009, these same real estate experts hailed it as definitive proof that the market had bottomed out and was on the rebound, despite the fact that August is every bit as slow of a month as January.

So where are we really? Why are we seeing fluctuations in the median price? Why are we seeing multiple offers on listings? What is going on?

The reality of the San Diego market, as I explained this morning, is that the current housing inventory is artificially low for 2 reasons –

1) The banks are withholding inventory from the market – homes they have foreclosed on but are not releasing to the market and selling. This is the “shadow” or “phantom” inventory of foreclosed homes that the banks publicly deny exists, but may number as high as 20,000 in San Diego County and higher in Riverside County, and stands to increase dramatically in 2010 and beyond.

2) Four concurrent foreclosure moratoriums in 2009 meant that most people who were in default and would have been foreclosed on in 2009 did not get foreclosed on and therefore their homes have not hit the market.

Finally, as I mentioned on the air this am, historically, the San Diego market has been a roller coaster, with very high peaks and very low bottoms. We had a peak in 1980, a bottom in 1984, a peak in 1990, a bottom in 1996, a peak in 2005 and a bottom…I would say in 2012. Why? Consider this: a tremendous number of people in San Diego either bought at the peak of the market and put very little down (as the banks lending guidelines encouraged them to put as little down as possible), or refinanced at the peak, and pulled out all of their equity. In other words, many, many people owe peak prices on their homes.

In other words, they are upside down, and will continue to be so until prices come back up to peak levels. Until then, If any of these people need to sell for any reason, be it a job transfer, job loss, divorce or any other reason, they are going to be best case, a short sale, and worst case, a foreclosure, which will continue to put downward pressure on prices in San Diego County.

Matt Battiata doesn’t give up easily.

In January 2009, the CEO and lead listing agent for the Battiata Real Estate Group traveled to Washington, D.C., on a mission. Meeting with representatives from both houses of Congress, Battiata lobbied for his plan to stem the tide of foreclosures, a plan he still regards as “maddeningly simple.” The proposal, which he says doesn’t cost the government a nickel: compel banks, which were getting a $700 billion government bailout, to reduce fixed interest rates for buyers and homeowners to 3 percent, and allow upside-down homeowners (those who owe more than the current value of their properties) to refinance.

It didn’t happen.

“The problem with all the government programs they’ve come up with,” Battiata said from his Del Mar office overlooking I-5, “is they were all voluntary on the part of the banks to participate. The government didn’t put any teeth in them.”

At least it didn’t last year. Battiata is headed back to Capitol Hill in early February to again meet with members of the House and Senate. His proposal will be much the same, but this time “I’m going to say ‘Look what’s happened the past year.’”

Battiata can point to San Diego County, where “we had four concurrent foreclosures moratoriums (the last ending in September)” designed to give banks time to modify borrowers’ loans. But the banks opted for what Battiata calls a “Band-Aid” approach. “Most of these people need a dramatic reduction in their payment, and the banks are just not willing to do that.”
Now, as a result, Battiata expects “a deluge of foreclosures” in the first quarter of 2010 as inventory held back by the banks — and held back, he says, as an asset to inflate those institutions’ bottom lines — start to come on the market.

“It’s a shell game,” Battiata says.

Any perception that the real estate market has bottomed out and that 2010 stands to be a comeback year is “artificial,” Battiata adds, because the housing inventory, minus the foreclosures, has been artificially low.

Battiata, whose firm averages up to 200 transactions a year, acknowledges that he isn’t painting a bright picture for the new year. “Real estate agents all kind of spout the company line, which is that everything is great,” he said. “I don’t understand that. It’s a responsibility of mine to tell the truth. For some in our industry, that’s like heresy.”

A frequent guest expert on local TV and radio shows, Battiata realizes, too, that delivering grim news may limit his airtime. “I always tell the truth, and I think the news (programs) get tired of hearing it,” he said. “It’s not popular right now to tell the truth.”

While there may not be good news on the real estate horizon, there could be a silver lining in San Diego County this year. Battiata expects to see “a lot of first-time buyers” out there “because the market has become more affordable.”

But “the buyers we don’t have out there are the trade-up buyers. They don’t exist because most people don’t have any equity.”

It’s a reality, Battiata says. “I take a lot of pride in the fact that over the last three to four years, I’ve been one of the lone voices (in the real estate industry) for reality.”

Getting his voice heard has proven to be a formula for success for Battiata, who embraced the idea of marketing his skills and that of his 11-year-old real estate group early on. “It seemed to me,” he recalled, “that most real estate agents were still operating in the dark ages. I saw a lot of agents who didn’t do any marketing whatsoever.”

Seeing an opportunity, “I started advertising right away,” Battiata said. “It was trial and error in the beginning. I experimented with a lot of different things.”

Not only did Battiata discover the benefits of branded advertising, but he “decided to position himself” as an expert in the real estate field. Visit his company’s Web site, battiata.com, and you can track his thoughts on the industry and the market through archived segments in print, on radio and on television.

The exposure is in line with his strategy of enticing customers to come to him, rather than his wooing them. “Real estate,” he said, “is one of the only industries that will cold-call people to get business. We did about 200 transactions in 2009, and every one of them called me first.”

You don’t see doctors cold-calling potential patients, said Battiata. Why should a real estate agent? “It’s just a different way to position yourself,” he said.
Battiata’s radio and television campaigns, plus direct mail and Internet strategies on behalf of his buyers and sellers, are also part of his moving forward in an industry that can be reluctant to do so. “Real estate has stayed in this sort of ‘mom and pop’ (mode),” he said. “They end up giving really bad service.”

In this troubled real estate environment, Battiata devotes much of his service to customers who owe more on their mortgages than their houses are worth. “We’re doing hundreds and hundreds” of so-called real estate short sales. In touting the benefits of the short sale to the embattled homeowner as well as to the lending institution, Battiata borrows a phrase heard often on Capitol Hill: “It’s good for Wall Street and for Main Street.”

It sounds like Matt Battiata is primed for his return to The Hill, and he’s more optimistic about his prospects this time around. “I think you might see things change in Washington,” he said, “as far as the approach it takes with banks goes.”

His ultimate goal, now as it was last year: get buyers back into the market.

Would real estate prices continue to drop, or were we at the bottom? How would the $700 Billion government bailout impact the market? Would it trickle down to homeowners and local businesses? Would the banks start lending money again? Would the nation’s large lenders make a real, meaningful effort to stem the tide of foreclosures, or would the number of mortgage defaults and foreclosures continue to rise? And finally, what impact would the financial crisis have on the rest of the economy? Would the pain be limited to the residential real estate market and the stock market, or would it spread to other sectors of the economy as well?

My predictions were as follows: Left to their own volition, the banks would not make a good faith effort to modify loans or lend out their new found money but would instead hang onto it to brace for the coming wave of foreclosures. In other words, the bailout would do very little to help the real estate market, homeowners and businesses unless the banks were forced – forced – to start lending again and to modify borrower’s loans in order to prevent foreclosures. The real estate market would continue to drop, and foreclosures and defaults would skyrocket in San Diego County. 2009 would be The Year of the Short Sale, and the pain would no longer be restricted to the sub prime and first time buyer markets, but would instead spread to the middle and high end priced echelons of the real estate market. Finally, it would hit the commercial real estate market as well, as office buildings, industrial space, and retail would start to go empty and eventually go to foreclosure as landlords became unable to continue making their payments.

That was December of 2008. In January of 2009, I traveled to Washington, DC to lobby the US House and Senate. My perspective was one from the front lines of the Southern California real estate crisis. I told our elected representatives what the banks were doing, and more importantly not doing at that point, to stem the tide of foreclosures and help people stay in their homes. I expressed my frustration at how disorganized and overwhelmed the mortgage lenders’ loss mitigation departments were, how the lenders were uniformly unwilling to modify borrowers loans, and how difficult it was to get a short sale approved and closed, despite the fact that, in the majority of cases, it was in the best interest of the bank and it’s shareholders. I told them that they way to revive the real estate market was not to reduce mortgage balances (Barney Frank’s proposal at the time) but rather was to reduce interest rates for buyers and existing homeowners (down to 3%), and to let upside down borrowers refinance to the low rates. Finally, because I knew that the new administration would be drafting new legislation, I strongly urged The House Finance Committee to attach conditions to the TARP bailout that would force the banks to lend out the taxpayer money they were being given, to adequately staff their loss mitigation and customer service departments and to make a meaningful effort to help modify borrowers loans and stop foreclosures.

“If you make it voluntary,” I told the Chief Counsel to the House Finance Committee, ” the banks are not going to do it..”

I knew this because we had already seen how the banks responded to The Bush Administration’s Hope for Homeowners Act of 2008. This was the bill that went into effect in October of 2008 and allocated $300 Billion of taxpayer money to lenders if they wrote down mortgages to 90% of the property’s appraised value. The government predicted this would save 400,000 homes from foreclosure. As of the date of my arrival in Washington DC, almost five months later, only 451 applications had been processed and 25 loans had been modified. The House Finance Committee scheduled hearings to determine the problem, but the problem was obvious, the banks were not participating. It was a voluntary program.

Fast forward to Dec 2009. Unfortunately for San Diego, 2009 played out pretty much as I had predicted. The only real difference was the passage of 4 consecutive foreclosure moratoriums, the last of which expired in September of 2009, that effectively stopped banks from foreclosing on delinquent homeowners. The purpose of these moratoriums was ostensibly to give banks time to modify borrowers’ loans so they could avoid foreclosure. The moratorium temporarily stopped foreclosures, causing housing inventory levels to drop dramatically in San Diego County, but it did not force the banks to modify loans to any meaningful degree.

The result: a huge backlog of foreclosures – homes that could not be foreclosed on because of the government moratoriums – that will be hitting the market in 2010, now that the moratoriums have ended.

Which brings us to what 2010 will bring for the San Diego real estate market.

If 2009 was the year of the short sale, 2010 will unfortunately be more of the same, but the market will be peppered with a much higher number of foreclosures. The banks have a tremendous number of homes that they will be foreclosing on in 2010 – homes that they could not take back in 2009 due to the moratoriums. They also have a huge number of homes that they have already foreclosed on – known in the real estate industry as “shadow” or “phantom” inventory. These are homes the banks have foreclosed on but have held onto in an effort to make themselves look more solvent than they actually are. These homes are sitting vacant at a huge expense to the banks, need to be sold and will begin to hit the market in 2010. All of this means more depreciation for the San Diego housing market in 2010, and unfortunately, no bottom. Finally, we will see more and more commercial foreclosures, as vacancies hit record high levels and more commercial property owners are forced to default on their loans.

I will be traveling back to Washington DC in January of 2010. My message will be the same – reduce interest rates down to 3% for buyers and existing homeowners, allow upside down borrowers to refinance to the lower rates (and turn their loans into recourse loans in order to encourage responsibility), force the banks to increase their loss mitigation staffing for short sales, and finally, force the banks to start lending again. Our real estate market and our economy depend on it.