While January was a slow start for the San Diego real estate market, February showed some recovery in terms of pending sales activity. Overall sales were down from last February by almost 4%, but this was due to the unusually low pending activity in January. The pending sales activity in February is almost identical to the pending activity last February. This puts 2010 on track to last years market activity. However, we do see some major differences in the sales mix profile. Homes with sales prices less than $400,000 have dropped 15% in sales and their percent makeup of sales has declined by 8%. This time last year this market made up 77% of sales and they makeup 69% now. We see from February pending activity that the under $400,000 market continues to drop as a percent of total

sales to 65%. This would seem to indicate some softening in this market segment. There are more homes in inventory for this market segment than have gone pending so supply is available for people to purchase. Prices have gone up significantly, about 20%, since March 2009 so it is possible that some buyers are being priced out of the market.

Another trend worthy of note is that for the first time in about 2 years the inventory is rising. From January to February inventory grew by 8.5% and so far in March it has grown another 3.5%. The growth in inventory is broad based with all price ranges showing inventory growth. We still have a market disconnect between the list prices of inventory and list prices of sold homes. The current average price of the homes in inventory is $918,000 while the average price of the homes sold is $413,000. However, the list price of the new listings for February is $557,000 which will help close the gap between inventory and what is selling. Part of the problem causing multiple offers in the San Diego market is that the entire inventory is not available to the current buying pool due to price. This exacerbates the price effect on an already inventory short market. While the inventory grew month over month the pending activity also grew making the change in months supply very small keeping the overall market in “sellers” market territory.

San Diego real estate price increases slowed during the November to January time period; however, February had larger price increases – average 2% month over month increase. This is to be expected as we head into the higher priced spring market. In the last 9 months of 2009 prices increased as much as 20% - depending on home size and neighborhood. I do not think that 2010 will be able to match the 2009 price increase trend without significantly impacting demand. If we see demand soften and inventory continue to increase causing the months supply to get larger we will see a price neutral market. Of course, interest rates are an important part of the price equation. If interest rates increase price increases will soften more quickly and if interest rates decrease they will soften the blow of increasing prices and increases will continue for some time. The tax credit will also have an impact on demand. Currently they expire at the end of April, if they are not extended again we could see demand soften starting in May.

 Another element of price direction is foreclosures and short sales. Foreclosures sell for less than short sales and short sales sell for less than regular sales making distress sales popular with buyers. Foreclosures continue to makeup 30% of San Diego sales while only making up 10% of the inventory. While foreclosure inventory has dropped over the past 6 months the sales continue to be a major force in the market. Currently foreclosure months supply is less than 1 month. I believe that the distress sale component of the market is further evidence just how price sensitive the San Diego real estate market is to current buyers.