January 2010 started the year with a bit of a thud. January sales are generally lower than the prior December sales; this January had a 35% sales decline while typically in the past the sales decline for this period averages 22%. Normally we

see a 20% increase in January pending sales versus December pending and this January the increase was only 12%. While the January data would seem to indicate a slowdown in the San Diego real estate market the selling activity in the past 4 weeks, with over 3,000 pending sales, indicates that the market remains strong going into the spring market.

This chart shows the movement of classifications - foreclosures, short sales and regular sales - from active to pending to sold. Note the composition of distress sales in active and how they increase in the sold composition. As a rule foreclosures sell for less than short sales and regular sales and short sales sell for less than regular sales. Again giving some conformation to the importance of price in the current market.

Inventory has been steadily declining over the past 18 months, in January the inventory had a 6% increase from December and the inventory increased another 5% in the first 2 weeks of February. Increasing inventory during this time period is normal as people put their homes on the market for the spring market.

The months supply is still below the 3 month level which is still in seller’s market territory. We still have a bit of a disconnect between inventory prices and sold list prices with the average inventory list price at $922,000 while the sold list price average is $409,000. This difference in list prices makes the months supply picture even more in favor of sellers and is creating multiple offer (bidding wars) situations which is pushing prices higher. An indication of the price imbalance between sold list and inventory list is the days on market. The sold days on market is 53 days and the inventory days on market is 98 days. While the differential exists across all price ranges it is less at the power end and larger as you move up the price ladder.

Price levels in the San Diego real estate market are generally above January 2009 price levels by about 10% overall. However, this does depend on neighborhood and home size; in some cases prices are still lower. Price trends are dictated by the supply/demand relationship and we do not see any material change away from a sellers market in general as long as the overall economic situation remains as it is. We are seeing today a continuation of multiple offers on homes up to over $700,000 and this will continue to push prices upward. While we saw a slowing of price increases in the past few months that is normal as the winter season tends to be the lowest price season of the year. We are now getting ready to head into the market time which is the highest price season so we expect to see a continuation of price increases in the market.

The chart below shows the sales distribution by price for the past 5 years. Note the large increase in sales below $400,000 which reflects the price decreases during the past 5 years. Also the 2009 curve shows movement back torward the higher price curves of the recent past indicating the price increases experience in 2009.