The question for the spring San Diego housing market is “where is the inventory"? Over the past year we have seen the inventory, or homes for sale, drop from over 19,000 to just over 9,000. We now have a housing shortage of homes for sale. This shortage is due to two factors: rising demand and lower supply, or rising sales and fewer listings. Demand is strong: home sales remain higher than the past two years and pending sales are steady around 4000 per month since March; at that time we noted a 30% increase in demand. Supply is falling: fewer listings are a combination of backlogs in bank owned homes, and normal sellers not able to, or wanting to, sell at current prices. Rising demand and lower supply is the recipe for price increases. Indeed, the San Diego County resale market is now at only 2.6 months supply, a level not since 2004. This chart shows the months supply by price range where you can see that except for the very high price segment supply is low. (A neutral market has 4 months supply; months supply = inventory/pendings in the last 30 days). We are now seeing 10 - 30 offers on a home, depending on the price point. The higher demand is not yet showing in the sales numbers because the increase in pending activity only began in March, and with the longer escrow periods it is taking time to convert pendings to sold homes. There are over 7,000 pending contracts in the pipeline and if you add contingent sales (seller accepted contracts’ waiting for lender approval), the number of seller accepted contracts is over 10,000! We now have more seller accepted contracts than homes for sale! The real demand exceeds what the numbers indicate because of the number of multiple offers to purchase homes. It is not unusual to see numbers as high as 20 to 30 offers on a home. This shortage of inventory is causing bidding wars similar to the recent past and that is pushing prices up. We see upward price trends both by home size and for the region as a whole, so the trend is fairly broad based. These charts show the % month to month price changes by home size and by San Diego region. For the past few months we have seen prices trending upward, totally expected in the current market environment. Months supply is at 4 months or below for home sizes below 3000 sq ft and is 6 months or less up to $900,000. However, even more expensive homes are not falling in price, due to the shortage of homes for sale; while year-over-year demand is down for homes over 2500 sq ft, the lack of inventory is keeping the months supply low so we are even seeing price increase trends in the mid-high market. If the current market conditions sound familiar from the recent past, it is. We are in fact entering a new bubble for many market segments with demand far outstripping the supply in price segments below $500,000, and to expect different results from our past experience could be disappointing. Bank owned homes (or REOs) are a smaller part of the market due to foreclosure moratoriums, and currently make up about 6% of the inventory. Short sales now make up about 26% of the active inventory, a decrease from prior months mainly due to the new MLS classification, Contingent, which required agents to convert their Active short sales to Contingent status if their seller had accepted an offer but was still waiting for bank approval. If we look at the buyer profile we can see that the recent spurt in demand is caused by the influx of a different buyer than a year ago. Last year, conventional mortgages made up almost 80% of the sales, and cash and FHA buyers small players. Now conventional buyers are only about 40% of the market, with cash at 25% and FHA at 35%. We also see new buyers jumping in at price points below $200,000. This market segment has doubled in absolute sales and as a percent of overall sales, and accounts for over 80% of the sales growth from last year. The under-$200,000 price range increased from 22 sales in May 2005 to 783 sales in May 2009 (inventory is 1580), while the over-$1 million price range decreased from 296 in May 2005 to 95 in May 2009 ( inventory of over 2400). These charts show the sales and the sales mix by price point and they clearly show what prices are attracting the new buyers. In another sign that house prices are still too high for area incomes is the disconnect between the list price of sold homes versus the list price of homes in inventory, measured by home size. The average sold home is much cheaper than the average unsold home. The average sold home has a list price of just over 60% of the average for-sale home, and we see this pattern across all home sizes. This chart shows the sold/inventory list ratio by home size and is an indicator of the buyer profile in the current market. Obviously there is an affordability issue with the current buyer pool in terms of the price levels they can purchase. The net effect is that the effective inventory is actually lower than the 2.6 months because much of the inventory is out of the affordability range of most of the current buyer pool. To me this indicates that many home prices in San Diego are still out of the reach of the buyer pool, which would indicate that some prices must still go down to reach a normal market. Except for the very high end of the market, prices are being sustained and in some cases increased, by very low inventories. Inventories are low because of the lack of homes being listed. Unlike the 2004 era when inventories started to increase because sellers had a good profit motive to sell, we are now faced with sellers either not being able to sell because of a lack of equity, or not wanting to sell because they don't like today's prices. In addition, foreclosure moratoriums and listing delays have cut the number of REOs to a fraction. As a result, inventory is too low for the number of buyers. Half of San Diego is made up of renters, so the potential buyer pool is large. The $8000 tax credit, low interest rates, and affordability have fueled their entry into the market. In addition, investors from outside the state are coming in seeking bargains. However, eventually we could see the reverse: higher supply from foreclosures and lower demand from higher interest rates and job loses. Another fly in the ointment looking forward is the new (May 1) HVCC – Home Valuation Code of Conduct. Appraisals are taking much longer to get completed potentially impacting escrows by going beyond the loan lock period and exposing the buyer to the new higher interest rates that could change their loan qualification. In addition, the new appraisal methodology is stricter than in the past so some homes may not appraise forcing sellers to either lower their accepted price or look for cash buyers. Right now there seems to be a lot of confusion about the new appraisal system and its’ impact on the market. |