Trends in the San Diego real estate market continue to indicate the market is transitioning into a more neutral market – softening demand, increasing inventory, price increases slowing and months supply growing. The heat of the 2009 market has cooled off, which we expected. While the 2^nd quarter of 2010 is slightly ahead of the same period in 2009, June is showing declining sales versus last June. Pending activity is also slowing down. June pending is lower than the average pending of April/May and July to date is running at a rate 17% below June pending. The drop off in demand is in spite of historically low interest rates so there are other issues of affordability in play. The tax rebate program which ended on April 30 may have the affect of bring sales forward, which would be typical of incentive programs. Also, the price increases over the past year may be pushing first time buyers out of the market.

We are seeing the continued shift in sales away from lower priced homes and neighborhoods. In June, only Central San Diego Coastal ($764,000 average selling price) and North County Coastal ($640,000 average selling price) had increasing sales from last year. Also, the trend of declining sales in the below $200,000 market segment continues. Over the past year this market segment has lost 25% in market share, dropping to 20% of total sales. The San Diego market is also seeing a trend of reduced market share for foreclosures. Over the past year foreclosure sales have lost 41% market share, declining from 34% to June’s 20% of total sales. During the same period short sales have increased their market share from 21% of sales to 26% in June.

The key to the price performance of the San Diego market is the relationship between demand and supply. Prior to 2010 the market had a steady decline in active inventory and for most of 2009 was averaging around 2.5 months supply, a sellers market. Since January 2010 active inventory has been on a steady increase, June inventory is up 40% from January, putting the current months supply at 4 months, a more price neutral market. We still see a major disconnect between the inventory and the demand with 20% of the inventory being in homes priced over $1 million which represent 5% of the sales market. However, the inventory growth is coming in all price ranges with the overall increase from May to June being 9% growth. The list price differential between inventory and sold homes has been extremely large. In June 09 the average list price in inventory was $1,089,000 while the average list for sold homes was $378,000.

This gap has been closing over time and in this June the Inventory list price was $888,000 and sold list price was $437,000. Part of this reduction in the gap between list prices has been new listing have lower list prices than the expired, cancelled and withdrawn listings. No we know why there have been multiple offers on some homes and no offers on others.

Due to the demand relative to the supply in the San Diego housing market home prices have significantly increased over the past year. An average 1100 sq ft home sold for $256,000 in June 09 and sold for $302,000 this June, an 18% increase. The overall average for all home sizes increased 12% year over year. A continuation of this level of price increase is not sustainable for the San Diego housing market due to buyer affordability issues. While prices are still generally increasing, we are seeing a reduction in the percentage of the month over month price increases. The increasing inventory and months supply will tend to keep the price pressure for increases low and as the year moves on we will see stability in prices. One issue that impacts the price picture is the mix shift to higher priced neighborhoods (Coastal Regions) and the reduction in market share for foreclosure sales. The pecking order on prices is foreclosures are the lowest price, short sales next and the highest prices go to owner occupied regular sales. Both the neighborhood shift and the reduction in foreclosure sales have the impact of raising average prices making it difficult to see how much of the price changes increases were due to mix shit or actual price. All 6 regions in San Diego County had price increases in June versus last June, with the highest increase being 21% in South Bay. Also, each region had increased prices from May prices except for East County. Since each region has different levels of foreclosure sales, different inventory levels and differing neighborhoods their price performance seems to support the thesis that prices are increasing independent of the impact of foreclosures, etc.