I’m Going to Rain on Your Parade

[Steve Beebo]

I’m not saying the real estate market is completely stable right now, and I’m not saying that prices aren’t going to drop some in the next 5 years, but I really don’t think that the market in San Diego is quite as bad as most on this forum believe.

Some things to think about:

– The median SFR price is up about 2% over the last year. Last months’ sales were lower than the same month last year, but there were still 2200 SFR sales, vs. 2900 sales last year. There are still a lot of people buying properties right now.

– It seems to me that the increase in inventory in San Diego County is starting to slow considerably.
Hasn’t the inventory as measured by Zip Realty been around 23,000 for the past month?

– It’s been well-publicized that condo prices have dipped from last year, but I believe that dumping a couple of thousand low-priced apartment conversions onto the market in the past couple of years is depressing the median condo price. Not all condo complexes are dropping in value. I’ve been an appraiser in San Diego for almost 20 years, and I’ve seen plenty of properties and comparable sales in the past month that have not dropped at all in the past year. I know this is not going to be believed by most forumites, but some condos in San Diego have actually increased in value over the past 6 months.

There are some weak markets, to be sure, especially downtown condos and some newer developments, but other areas seem to be very stable right now, with about a 4-6 month supply of listings.

Foreclosures and pre-foreclosures are going to be increasing, but it’s only natural to have some REO sales in a large metropolitan area. We really haven’t had any for the past 5 years, so when you read that foreclosures are up 200 or 300%, keep in mind that even if they were up 1000%, the total foreclosure rate would still be very low.

I don’t really care if home prices drop a little or a lot. We own a home with a lot of equity, but we also have two daughters graduating from college in the next year, and for their sake I wouldn’t mind if prices did drop quite a bit.

[ocrenter]

that 20 year experience is valued. given that. tell us about how things are different now vs. 1990 and how things are the same.

one big difference I see is how did we get to historic high in inventory in 2 years (top of market being in 2004) this time around yet last time it took 5 years to get to the last inventory peak in 1995.

as an appraiser, how is the heavy discount new home builders are offering affecting the resale SFR?

[Anonymous]

Well I think you have some valid points. I’ve been wacthing two areas very closely in s. Escondido (92025 & 92029) as that is where we sold in late 2004.

There have been a few sales this year at relatively high prices, but there are also a lot of places sitting many at 140+ DOM. Some people have kept the same price for over 6 months, some have cut 4 even 5 times and are still not moving. Granted, they started way high though.

It’s just a standoff right now. I think buyers are hesitant to plunk down the big bucks in a market that if not clearly declining has at least clearly stalled. Sellers meanwhile want top dollar or close to it, they counted their money before they had it in hand and they don’t want to let go of their big cash out dream.

I think the market needs something to either push it down or sideways at this point. If interest rates keep rising or jobs get shaky that is a push down. If interest rates stall then I think the market could go sideways for quite some time.

BTW, one difference I remember from the last downturn, is that rates were going DOWN while prices were going down! I clearly remember buying our fist house in 1993 and my father-in-law patting me on the back for getting a 7 1/8 fixed and how we were so lucky to lock in a low rate. He had bought in ’91 and I think had to pay 8-something. Who knew that 10 years later fixed loans would be low 5’s?

Now we have prices at least stalling and rates going up. If they keep going up I think it could break the market’s back. If not, maybe indeed this is a stagnant/high market.

Bums me out I’d like to and am able to get back in, just don’t want to pay these prices even though I could.

[Anonymous]

One more thing which might bouy this possible downturn. We’ve heard for years land is scarce in SD. Well, now it is more scarce than ever and far more than 1990. Escondido for example (taking that as I am most familiar with it) is essentially “built out”, there just aren’t more tracts of nice buildable land left. Sure there are some infill lots for 4-5 houses, but the days of the massive tract development are over. I remember years ago they predicted Escondido would top out at 125k population, now it is 130k+ but clearly can’t go up forever.

I’m wondering if this relative tight land situation could indeed push us to a “permanently high plateau”. Don’t get me wrong I hope things go down. But we do need to recognize things are indeed different now.

[powayseller]

merlin, we have overbuilt, people are leaving San Diego at the rate of 40K/year, and 30% of listings are vacant. Don’t worry about demand being strong: we have 8 homes for every buyer!

Steve – we covered the uselessness of the median ad nauseam yesterday. Basically, high end is hot and low end is stalled, skewing distribution of homes sold. Accurate pricing you can get from Case Shiller index or OFHEO.

[bigmoneysalsa]

Steve thanks for posting. We don’t get a lot of thoughtful contrarian opinions here so it’s good of you to keep us on our toes. Regarding your thoughts:

– Median prices are a lagging indicator, and as powayseller mentioned above there are other indices that are probably better. Also, is 2200 “a lot?” You didn’t provide any historical context for those numbers. Even if so, don’t you think that a 24% drop in sales says something about where prices might be going?

– Check out http://bubbletracking.blogspot.com/2006/07/tracking-san-diego-county.html inventory seems to be going up at about 1000 – 1500 per month and has been since the start of the year. So far in July we are up about 450. A little slower but not much.

– Of course not all condo prices have fallen. I don’t think anyone has been foolish enough to claim that, or to claim that there are none that have gone up. Even in a down market surely there are many properties that go up due to other factors (gentrification of a particular neighboorhood as an example). What we are interested in is where the market as a whole is going.

– You’re right that until recently foreclosure rates were abnormally low and the current rates are not so bad historically speaking. The question is why were they so low before? The simplest answer is that rising prices allowed people to avoid foreclosure by selling at a good profit. So while the end to these abnormally low rates isn’t direct evidence that prices will fall, it is direct evidence that prices aren’t rising much anymore.

[UP IN ARMS]

good post

[rankandfile]

I think that being under or over built is relative and depends on who you talk to. The environmentalist thinks that Montana could use some more open space, while a developer or economist could see packing 3-5 million more people into SD County. If we are so over-built, why are organizations like SCAG and SANDAG predicting massive increases in population at least until 2030? Why does CalTrans have plans to potentially widen I-5 to as many as 8 or even 10 lanes on each side?

I don’t have hard data at this point, but I believe that there is more than plenty of open space and “room” to develop and create more housing in SD County…tons of it in fact. A huge reason why people are leaving SD is because it is so freaking expensive to live here and wages are average at best! Huge rent and mortgage payments go without saying. $3.50 gas is another big factor because you MUST have a car in order to make it out here! Smog, hot weather (inland), traffic, etc…these also help explain the exodus.

The influx of (legal) population is due IMHO to opportunity and weather, in that order. But when wages are stagnant and transplants can only afford to live an apartment in the hotter inland towns, if that, why not go to a cheaper state?

[powayseller]

I’ve read some of the SD County government projections, and they are overly optimistic. Have you ever heard SANDAG admit that people are leaving San Diego? Their projections take the recent influx, and extrapolate it at an increasing rate. Now that the trend has reversed, their projections are less useful.

Eventually people will return to SD en masse, but for now, we have overbuilt, and we have 8 houses for sale for every buyer. Too many houses for the people here, and that is a fact.

[Anonymous]

The OFHEO index is also skewed because it includes cashout refinancing and of homes which have appreciated a lot.

[ocrenter]

the myth of a housing shortage is best explained by UCLA’s Thornberg when he said: the shortage is in low income affortable housing for the poor. Then he asked this question to the developers: how many of you are willing to build cheap affordable housing for the low income? None, because the profit margin isn’t there. So there’s a glut of McMansions, and not enough folks that can afford them to buy. The end result is decrease in prices.

[anxvariety]

Durr, houses are only worth what people will pay for them.. an appraiser might just assign a value, but with 10% interest rates and skittish buyers the price will be determined by supply and demand.

[LookoutBelow]

Precisely OCRenter….If the liquidity in the markets is drying up by either of 2 methods, increased interest rates or by, raising the bar for borrowers requirements, IE: larger down payments, higher credit scores etc, the market will soon be saturated at its current prices. Pirces must come down to offset these fundamental changes. Its an economic law.

SANDAG will NOT tell the truth anymore than a politician will vote himself a paycut. There is no money in telling the people that, so its avoided, spun and even lied about.

Either way, the market will always eventually balance itself out. Kind of like the “SoCalled Labor Shortage” we keep hearing about by the politicians who are all for allowing illegal immigration, Yeah Sure, there IS a labor shortage for jobs that pay 4 bucks per hour with no benefits…but take that same job and pay the worker a higher, more decent wage, and watch and see how fast those teenagers and others will push those lawnmowers and run those weed eaters !!

Its coming….Sony with their video games must be worried about future sales. Hahaaaa !

[Steve Beebo]

Powayseller – A couple of things you mentioned – You say 44,000 people have moved out of San Diego, but the total population of the County is actually still growing, due in large part to immigration and the birth rate. According to the State Dept. of Finance, the County population grew almost 1% from 2005 to 2006. That’s not much growth, but it’s better than nothing. High home prices do discourage people from moving here, and encourage others to leave, but there is still growth. If population growth were a negative number, then housing prices would have to drop more than the small decrease that has already happened in some areas.

Also, you say that there are 8 buyers for every house. I don’t know where you get that number from. In June there were 4400+ resale homes and condos that closed escrow. If there are 23,000 homes and condos on the market, there is a little over a 5 month supply of homes on the market. That’s the sign of a fairly flat or stagnant market, but not a horrible market. Also, some of the 23,000 listings are new homes and condos and shouldn’t be counted, because I’m not counting new home sales in the 4400 sales from June. If we get to a 8 or 9 month supply of homes on the market, then we’ll have a really bad market.

Regarding median home prices, I do think that the numbers are very useful. There is no 18 month lag in reporting the figures – there is really only a two month lag. The sales reported in June are for homes that mostly went into escrow in April or May. When you look at the monthly prices by zip code, those figures are completely useless, due to the very small sample size in some areas. But when you compare prices for the whole County to the same period one year ago, the numbers have always seemed pretty accurate for the typical home, and I’ve been watching the reported median prices since the 1980’s. And when you compare prices for the County for all 12 months of 2006 to all of 2005, then I think you have a pretty reliable portrayal of the market. I don’t think that the current figures are skewed by more sales of higher-end homes.

OCrenter – It seems to me that the market now is fairly similar to the market in 1990 or 1991. I don’t have the exact figures, but I think that if you adjust for the population increase since 1990, that the inventory numbers are similar. One thing that has to be hurting the new home market, and resales of nearly new homes, is that builders have had to boost prices way up to cover huge increases in building materials, (especially concrete, asphalt, and plywood).

[Anonymous]

Steve, per the San Diego Union Tribune back in March 2006, the population of the county decreased by 0.1% (2K folks) in the twelve months ending July 2005:

http://www.signonsandiego.com/uniontrib/20060316/news_1n16pop.html

Separate but related, there was a net exodus from the county of 43K folks. This net exodus must have been largely offset by births, etc. of 41K, to give us the decrease in population of 2K.

So, indeed, as of July 2005, the population of San Diego county was going down. My guess is that both the decrease in population and exodus to other parts of the U.S. is continuing and may be accelerating.

[Author]

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