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July 20, 2006

4

San Diego Real Estate Market Direction

by Bob Schwartz

Below is an article I had published 11/17/05. Now eight months later, with the 1st. reported home drop in San Diego Real Estate in about 10 years, it may be time to re-read this article:

 – A Trend to Go National?
by Bob Schwartz

Bob Schwartz ©2006 all rights reserved.

This material is subject to copyright and any unauthorized use, copying or mirroring is prohibited

Just this summer, it was almost impossible to find a new San Diego real estate development that cooperated with real estate brokers. If you could find a developer co-opting, it was most likely way below the traditional 3 percent rate.    

Well, just a few short months have passed and a current read of the Sunday homes section of the San Diego Union Tribune shows that though the real estate market does not make discernible moves in a day like the stock market, a couple of months can easily define the local real estate trends.

Here are just a few of the incentives noted in the home section of a very recent Sunday’s paper: 4 percent broker co-op, free plasma screen TV, $1,000 off closing costs, $2,500 in design center upgrades, $10,000 in incentives, one year HOA fees paid, $5,000 in closing costs, $2,000 closing cost credit, washer, dryer & refrigerator included, $25,000 in incentives or cash price reductions, $1,000 gift certificate, and no HOA fees for 2 years!

The grand opening long buyer lines, multiple offers, offers above the asking price and homes selling within days of being listed are just fond memories now. However, due to the huge home appreciation all San Diego real estate has seen, with the average home up 100 percent in the past 5 years, combined with the boom in 100 percent adjustable/interest only loans, the stage is set for what is sure to be mind-numbing depreciation.

This market did not turn on a dime. Back in June our year to date sales were off 6.1 percent. More importantly, our monthly comparison for June ’05 vs. ’04 showed a 12.3 percent reduction in sales. Also, the average days on the market for this same period, showed a 56 percent increase for detached homes and an astonishing 280 percent increase for attached homes! All this at a traditionally and seasonally strong marketing period. These figures were published by the San Diego Association of Realtors and are taken only from properties listed in the MLS.

According to the California Association of Realtors, only about one in 10 households in San Diego can afford to buy a median-priced, single-family resale home with a 30-year, fixed rate loan. Combine the above, with the multiple Fed interest rate increases and the proliferation of EZ qualification, 100 percent interest only financing, and the stage has been set for not just a ‘return to normal,’ but a major change.

When I first entered the real estate business the current philosophy was that if anyone asked, “How is the real estate business” the standard reply was “Fantastic!” A lot has changed in the last 20-something years. Many real estate agents still follow this ‘everything is coming up roses’ mindset. In the San Diego real estate market where I work, the average sale is over $500k. My clientele are very knowledgeable and I have yet to work with one who does not have Internet access at their home.

So, sure it’s great to be optimistic about your real estate market place, but ignoring the obvious trends will cost you in both money and reputation. It was about five years ago that the mantra was that this was a new paradigm and the stock market no longer followed the old rules of valuation. We were soon to reach Dow 20,000! Hopefully, you missed that costly over-enthusiasm. The result was such a drop that five years later we finally may be building a base.

What I’m saying is be up-front and truthful with your clients, especially sellers. In just one hot area here the last few sales showed huge drops in the actual sales price vs. the original listed price. In one case this difference was $100,000 or just about 20 percent of the listed price. The other differences were about 9 percent of the listed price. Personally, I attribute these huge reductions mainly to the agent’s inability to see that our market has turned. When you tell your seller that the real market is fantastic, it’s a little tough to get multiple price reductions.

Yes, we have started on the down leg of the typical ‘Bell Curve’ and the probability of surpassing our approximate 20 percent drop in San Diego home values experienced from 1990 through 1996, seems assured. Plus, as real estate trends seem to start in the West and then move east, any U.S. real estate market that experienced huge price appreciation the past five years, will experience the same depreciation in real estate residential values.

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4 Comments
  1. Jul 25 2006

    Just subscribed to your RSS feed. Great insights! I went thru this back in the 90′s. I can see the same thing occuring now.

    Personally, think all the huge suv’s are from people pulling out their ‘paper’ equity.

    With rates moving up and home values down…many will be way into debt!

    Look forward to your comments.
    Carol

  2. Mar 7 2008

    In the long term real estate always bounces back and people should take advantage of these slow periods if they really want to get a good return on their investments.
    erica
    acne medications

  3. May 1 2009

    in the long term, we’re all dead so why should I get up and go to work in the morning?

    San Diego California dentist

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