San Diego real estate home sales in March increased from last March by 3%. Detached home sales were flat with last year and condo sales increased by 10%. The 1^st Quarter of 2010 has slightly lower sales than last year this is primarily due to the low sales in January. February and March are tracking with 2009. The price trends of the past year and the current interest rate trends could dampen demand as we move through 2010. This year the market has seen a major shift in buying patterns. Homes that sold for less than $300,000 dropped from 55% of sales to 43% of sales this March. Another observable shift has been in regional sales performance. The more expensive coastal areas had major increases in sales year over year – 42% for Central San Diego Coastal and 34% for North County Coastal – while lower priced regions experienced price declines – South Bay was down 34% and East County was down 4%. This shift in sales from lower priced regions to higher priced regions will increase the price of median and average price calculations and will indicate higher price increases than actually happened.

Another indicator that 2010 is tracking with 2009 is the pending – signed contracts to purchase – are tracking at around 3500 for both years. For the first time in 2 years the San Diego housing inventory is increasing. In January the inventory was 7900 homes and as of this writing the inventory stands at 9361, an 18% growth in inventory. Due to the level of pending activity the months supply is staying around 2.7 months on a macro basis which is still a sellers market while last year the months supply was over 4 months. If inventory continues to increase and demand remains at current levels then months supply will grow and the market could shift into a different price paradigm.

San Diego home prices have increased substantially over the past year with low supply relative to the demand being the major factor in the price increases. All home sizes have higher prices than last year with an average growth in prices in the 20% range. The price increases in the past year have eliminated about half of the price decreases from the peak 2006 period. If 2010 were to experience the same price growth as 2009 the San Diego housing market would be very close to 2006 prices. I do not believe that 2010 will see the price increases of the past year because the 2006 price levels are not sustainable in the San Diego market, especially in light of the current interest rate trend. The combination of price growth and interest rate increases since the spring of 2009 has caused the principle and interest payment to increase by 26% for a typical 1500 sq ft home, which will push buyers out of the market. One could reduce the monthly payment increase by increasing the down payment; however, 30% of the San Diego market is FHA borrowing with low 3.5% down payments which indicates that the buyers do not have extra cash to increase their down payment. Also, cash buyers, generally investors, need prices to be at a level where they can rent out the property and get a return on their investment or flip the home and have a margin for profit. Currently cash buyers comprise 25% of the San Diego market where at 2006 prices cash buyers were only 5% of the market. As the cost to purchase increases the investment will become less attractive and the cash buyers will retreat from the market. It is important to mention that the San Diego market has already seen a decline in demand for homes priced under $300,000 over the past year as prices increased.

As 2010 progresses we expect to see a softening in demand, inventory to continue to grow, months supply to increase and prices to become fairly steady. Foreclosures in the first qtr of 2010 increased substantially over last year. This indicates that banks will have more bank owned properties to sell in 2010. However, I do not expect to see the banks “dump” these on the market at one time as this would only put downward pressure on prices which would defeat their goal of maximizing the price to reduce the losses they would have selling foreclosed properties.