Demand for San Diego real estate continues to soften in 2011. July home sales declined about 2% from last July and declined about 5% from this June. Of the 6 regions in San Diego County two, Central San Diego Coastal and East County, had sales increases. Central San Diego, North County Coastal and South Bay had sales declines pushing double digits. The demand for homes priced less than $300,000 had a year over year sales increase of 3% and made up 45% of the total market, versus 42% last year. For the past 4 years the market share of homes priced over $400,000 has remained fairly flat and well below 2007 market share levels, which to me indicates an affordability issue at current price levels. The San Diego housing market cannot return to the robust sales levels of the past until some combination of events makes homes priced over $400,000 more affordable to more buyers. Currently the San Diego housing market is down 27% in demand from peak years. One major change in San Diego July sales was the decline in distress sales (foreclosures and short sales). While the overall market declined by about 2%, foreclosures declined by 14% and short sales declined by 10%. It is too early to tell if this change in distress sales is a trend or just a temporary blip, clearly the inventory was available to be sold. The financing trends remain fairly steady with cash buyers at 25% of sales, conventional loans at 42% and FHA/VA at 31% of sales (“other” makes up the remaining 2%). It is difficult to predict future 2011 demand because of all the economic uncertainty but we expect the market to continue running slightly behind 2010 demand levels for the balance of the year.

For July, the relationship between supply and demand remained unchanged at 3.9 months supply. Both inventory and pending sales had month over month declines of 2% resulting in the unchanged months supply. Usually the market sees inventory growth as we move from January through the spring and into the summer; however, in 2011 the market has seen a fairly stable inventory through this time period. We believe that current market prices explain the lack of increased sellers. The inventory does not match up with the demand profile, a trend we have seen for a few years now. Inventory days on market is 15% greater than the days on market for sold homes. For homes priced over $500,000 months supply grows from 5 months to almost 13 months, while the average is 3.9 months those homes listed over $500,000 have inventory levels that exceed current demand requirements. The one piece of good news about the inventory levels is that they have given some protection against further major price declines. While the current market is seeing home prices decline, the declines are rather small compared to the 2007/2008 time period.

San Diego home prices in July declined about 3% from the same period last year continuing a trend of modest year over year price declines. Price declines are seen across all of the San Diego regional markets except for Central San Diego Coastal which had a 3% price rise in July. There is abundant evidence that home price is still the market driver for those buying homes. Distress sales comprise 43% of total sales far in excess of their 32% representation in inventory, distress sales are generally have list prices lower than normal equity sales. Comparing list prices of homes in inventory versus list prices of sold homes we find the sold homes on average have a 23% lower asking price. Based on months supply, I would have expected homes priced under $300,000 to be seeing some increased price activity and that is not happening. I can only speculate that the level of distress sales, 61%, in this price range is keeping prices from tipping upward. I believe that the San Diego market will continue forward with modest price declines as long as the current relationship between supply and demand continues.

The San Diego housing market is in a fairly steady state with no major changes in the major metrics. All changes so far have been steady and slow, although in a negative direction with demand and prices. Since the market is operating with historically low interest rates it is hard to see what will happen to spur demand upward other than another attempt at government stimulus which is not in the cards. Depending on the changes to FHA at the end of September there could be a negative push on demand if it pushes many buyers out of the market.