Single family homes are hanging in there, but the condo market is starting to look pretty sickly. Unless the Fed comes to the rescue yet again, San Diego real estate’s long and inevitable decline may begin very soon—if it hasn’t begun already.
Prices
The median price for single family homes (known as SFRs in the real estate biz) rose a bit, but condos were flat, after having declined the prior month:
Interestingly, despite the price flatness, condo breadth dropped noticably:
So while the county-wide median condo price is up 7% year-over-year, a full 24% of individual zip codes saw a decline in their year-over-year median condo prices. This may be attributable to statistical noise, but there is a chance that we are starting to see pockets of downward price pressure in the condo market. The SFR market, on the other hand, appears to be more firm.
Sales Volume
The sales data points to the same conclusions as the pricing data—that demand for SFRs is relatively strong, while condo demand is showing signs of weakness. To put some numbers on it, volume was decent for SFRs, down 3% year-over-year, while condo sales were down 17% from the prior year:
As this chart shows, year-over-year sales volume comparisons have been negative since July of 2004, but much moreso for condos than SFRs.
Inventory
Once again, the number of sales was dwarfed by the amount of inventory that has continued to come online for the last few months.
Downtown is starting to look particularly scary to me, having now shot right through 500 MLS listings:
According to DataQuick, in the one-year period ending 7/31/2005 there were 418 sales Downtown. If we were to assume the same number of sales this coming year, this means that there is a 15-month supply of Downtown condos.
But there are two reasons why it’s even worse than that. The first is that we can’t really assume the same number of sales as we had last year, because as we saw, the trend is towards declining condo sales, and Downtown is almost entirely condos. The second is that the MLS listings don’t even include newly built inventory that will be made available for sale. The Downtown glut has already begun and will only get worse.
Conclusion
Consider the following influences on the condo market:
- High and steadily rising inventory
- Declining demand, as indicated by a year-long trend towards lower sales volume
- A continual onslaught of new condo conversions hitting the market (units that, unlike those being listed by private owners, must be sold even if they don’t fetch the price that was hoped for)
- A stated determination on the part of the Federal Reserve to reign in the housing market
- Declining breadth
- And now, a two-month trend in declining pricing power
It doesn’t look good. Economic factors have not even begun to weigh on the market, and yet it looks as if the condo market may already be collapsing under its own weight.
The SFR market is still hanging in there for now, but if I am right about condos, it won’t for too long. If condo prices fall far enough, bargain-seeking buyers will start to favor of condos over SFRs, thus decreasing SFR demand. One segment of the market can’t fall too far without bringing the rest of the market with it, at least to some degree, although this process could take many months.
Of course, last week’s wholesale destruction of a crucial shipping and energy center will obviously shake things up. We could be tipped into recession, with potential accompanying job losses that could put downward pressure on the housing market. On the other hand, given the shock to the US economy, the Fed may back off its tightening campaign or even start cutting rates again. The resulting lower rates and lending standards could breathe new life into the incredibly credit-dependent San Diego real estate market.
Barring another lending frenzy, though, I suspect that condo prices will soon begin—and may already have begun—their long-overdue slide. Not a crash, mind you, but a slow slide. Prices won’t come under serious pressure unless rates go up a lot or people start running into financial trouble. I fully expect that we will get there at some point, but for now, condos have only just begun their journey down the road to affordability. The rest of San Diego may not be far behind.