Reading an article on the January home sales for the national housing market, I thought I would take a moment to put the San Diego housing market in perspective. According to the article the national January home sales were the weakest since July 1997. In San Diego January homes sales, in the past 6 years, are always lower than December. The average rate of sales decline is 23% and this January had the lowest decline from December except for January 2008. Of course the sales level last year annualized of approximately 16,000 homes could not go much lower without the market disappearing. You have to go back to January 2005 to get a higher sales level than this January. This January appears to be a continuation of the sales increases we have seen in San Diego since last April. More important than sales levels for the future outlook is the current buying activity, pending sales. The current buying activity is a predictor of near term sales activity. The buying activity in January was the best January since January 2004 and was only 12% below that level. Not included in the January pending activity are the short sale seller accepted contracts waiting for lender approval. Accepted short sale contracts were over 500 of the January listings putting the January buying activity over 3600 homes making January’s buying activity about the same as January 2004 indicating a strong buying mood in San Diego. It is important to know “what” is selling in the market. The under $400,000 market segment has basically dominated home sales. This January the less than $400,000 market segment comprised 75% of the homes sold. It is important to note that the under $400,000 market segment only makes up 54% of the inventory for sale, chart. Remember that when the market first began to soften the first market segment to decline was the lower price ranges. In January 2004 the under $400,000 market segment was 50% of sales then in 2005 dropped off to 25%. Beginning in 2007 we saw the lower price market segment begin to make up a higher proportion of the sales, 2007 32%, 2008 47% and 2009 75%. We all remember the median price increasing as the market softened this was because of a shift in what was selling and we are now seeing an accelerated decline in the median price due to the lower end dominating sales. Median price does not reflect the actual price declines but rather the distribution of what is being bought and can give a very misleading picture of the facts on the ground. What has happened in the San Diego market is that your buying dollar buys more home. For example in 2004 prices under $200,000 bought you on average a 786 sq ft home and now it buys you an average 1054 sq ft home, chart. We see this phenomena all the way up to the $700,000 plus price ranges where the home size purchased is relatively the same as in the 2004 period. While affordability seems to have arrived in the under $400,000 market segment creating increased demand the over $700,000 market segment appears to have demand problems. The over $700,000 market segment comprises 24% of the inventory and only 7% of the sold homes. We are seeing the price declines of certain market segments have a rate of decreasing price declines, which indicates that that market is moving toward price stability, chart. However, now the market faces price compression from the higher end of the market due to the lack of demand and excessive inventory. Due to the difficulty in getting jumbo loan and the cost of jumbo loans, the inability to get equity out of one’s current home to meet down payment requirements and the number of families that meet the income requirements for high end homes, it is difficult to see how increased demand will be created unless by price in this market segment. How far down the price ladder the price compression will go is difficult to predict. However, the lower price homes have had a greater percent decline in prices than the higher price end so the price gap has widened. This should indicate that the price compression will not go down to the lower price ranges. One can not discuss prices without mentioning foreclosures and their impact on home prices. Foreclosures comprise about 10% of current inventory and about 50% of homes sold. In January an average foreclosed home of about 1500 sq ft sold for about $255,000 ($172/sq ft) while an average non-foreclosed home of about 1650 sq ft sold for about $415,000 ($252/sq ft), roughly a 30% lower price for foreclosed homes. While foreclosures are selling well they will be with us for some time. Currently all bank owned properties are not on the market for sale; for example: Cardiff has a total of 16 bank owned properties and only 3 are listed for sale. We not only have new foreclosures coming but we still have not worked through the one already purchased by the banks. However, as one that has been through numerous bank owned properties, comparing them to non-bank owned is a bit like comparing apples and oranges. The condition of bank owned properties is such that most require fixing of one degree or another. So some of the money you save on the purchase you will spend on repairs. That said, the fact that they are selling indicates that buyers are buying price and taking on the repair work. Price, affordability, is driving the demand to the point that we see the list price of the homes sold to be 25% to 50% lower, depending on home size, of the list price of homes left in inventory. This article is not meant to indicate that the housing problems in San Diego are coming to an end. Rather it is intended to convey that based on current economic conditions that we can begin to see some light at the end of the tunnel. There are multiple reasons for the housing crisis nationally and they differ by locality. To over simplify Las Vegas has problems due to excessive supply caused by over building, Detroit’s housing problem is primarily caused by high unemployment and people leaving and the San Diego problem was caused by a shortage of supply at a time of increasing demand that caused bubble prices that destroyed affordability pushing down demand. The San Diego problem is the easiest to solve, although painful, by price declines making homes more affordable increasing demand. We see this at work today. How does Las Vegas solve the over supply problem without population growth or how does Detroit solve the unemployment and flight problems when it is dominated by the domestic auto industry. A recent article by Forbes shows where San Diego stands in current housing market trends versus national trends and is worth the short read. While there are some positive signs in the San Diego housing market the market still has very onerous potential problems ahead; such as higher unemployment, higher interest rates, tighter lending restrictions, future foreclosure activity and just the overall economic issues facing the country. It is anyone’s guess as to the future impact on the market from the uncertainty in the economy. |