State Of The San Diego Market April 2007

Remember how I said moths ago that I could see signs that the market might turn back this year, perhaps around the beginning of July?



That's looking to be a decent guess.



Making offers isn't quite the monopoly situation it was. Last week, I made an offer on behalf of a client, and the listing agent told me they got four offers on the property in a 24 hour period. I take those claims with a cynical mind, but my client's offer was good considering the market, and they have yet to counter. That agent is acting like somebody who does indeed have "offers to burn." If four people send offers to one of my listings, I send out four responses, whether they're rejections for hopeless low-balls or counters for everyone else. So far, it's just silence. Unless they're just going to accept one of the other offers as it sits, that's silly. An agent with more than about a week in the business isn't going to throw more money on the table without a counter from the owner.



However, the ratio of sellers to buyers is still about 30 to 1. Not as great as it was last year when the ratio hung in the 38 to 40 range for months, but buyers still have a lot more power than they had three years ago. And here's a critical difference: Properties that are properly priced to the market are drawing interest. I'm running into about two or two and a half times the number of other agents showing the same property I want to see as I was six months ago.



Condos, in particular, are starting to come back, where they were dead the last couple years. The seller to buyer ratio for condos is almost 10% lower than for detached housing. This is due, in large part, to the long delayed sub-prime lender meltdown. When you can metaphorically wave a magic wand and make it look like people with no down payment who cannot document the necessary income can afford the payment on anything they want, people are going to want single family detached homes. That's just the way it is. I lost at least half a dozen prospects that I can name to other agents because I was showing them the two bedroom condos they could really afford, while the other agents made it look like they could afford brand new four bedroom houses with negative amortization loans, often done on a stated income basis.



But now that lenders standards are in retreat, and some long anticipated legal action is starting to happen on Option ARMs, the loans people are being told about are a little less irresponsible. With most of the gonzo negative amortization 100% loans being gone, that means that agents have to sell something people can pay at least the interest on, or tell them they need a down payment. This existence of a down payment of 5% or more is black and white. People either have it or they don't. If they don't, no negative amortization loans. Since most people don't have it, and most negative amortization lenders are now limiting themselves to 80%, and most lenders don't want to stand second in line behind a negative amortization loan for some reason.



The upshot on all of this is that most folks have to make at least the interest every month, and that limits how far over their head unscrupulous agents and loan officers can go. Since it's difficult to make it look like they can afford a property three times more expensive than they should buy, now they are limited to properties no more than about forty percent more expensive than they can buy. Interest only loans are still just as available as they have been, as are short term hybrid ARMs. For people who can afford $300,000, most agents still aren't talking about the $300,000 condo - but they are talking about the $400,000 Planed Unit Development (PUD) instead of the $750,000 house.



Stated Income loans are going through most of the same things that negative amortization loans are. 100% financing has become far more difficult to pull off without a good credit score or ability to document that you make enough money - and "stated income stated asset" loans have been clamped down upon a lot harder than "stated income verified asset" loans. If you've got a down payment, a decent credit score, and money in reserve, you can still get a stated income loan. However, most folks that were buying properties fell into none of these three categories. Stated Income loans were never intended to be "anything goes." They were intended for commissioned sales folk and small business owners who really did make the money and could afford to pay their bills, but had a large number of deductions due to tax laws. With most folks having difficulty with newly tightened stated income guidelines, however, they're having to show they make enough money or go without. This means that they not only have to make the payments, but also that they are restricted to loans where they can prove they can afford the payments. In other words, if you want 100% financing, you may have no choice other than "full documentation."



All of this has consequences for sellers as well. I am going to make my computations off of top of the line A paper full documentation loans with no points, plus California property taxes, etcetera. For loans totaling $300,000 on a $300,000 condominium purchase, it will cost someone approximately $2500 per month for housing, which means they have to make $5000 per month in order to qualify, even if they have no other debts whatsoever. For a $500,000 home, the numbers are cost: $3875 and income: $7750 per month, assuming no other debt service. For someone who wants to buy a $750,000 home without a down payment, the numbers are about $5925 per month expenditure and $11,850 per month in income, assuming no other debts. For every $100 per month in debt service they have, raise the monthly income requirements by $200. How many people do you know with no car payments, no student loan payments, no credit card debt, no computer payments, no furniture payments, no payments at all? Furthermore, since Wikipedia has the median income as being $47,816 per year, or $3984 per month, the median person doesn't qualify for a $300,000 condo even if they didn't have any debt.



The farther up the price scale the property you are trying to sell is, the harder it's going to be to find a potential buyer. The upside is that people want to live in San Diego, and they will do what it takes to make it happen. The downside is that San Diego employers don't want to pay enough so that they can buy a house. You need to be realistic about how many people are competing for your property, and what their means is likely to be. To take the point of view that once you get paid for the property, it isn't your problem is not facing the entire scope of what's out there. Qualified buyers are scarce right now, if not quite so scarce as they were. Furthermore, most of the buyers at the upper end of the income range have already bought at least one property.



I think things are going to stabilize this year. Properties that are correctly priced are moving. Most of what's holding various properties on the market for months is denial on the part of sellers - trying to get more than the neighborhood will support. As a consequence, even though mean time on market is still high at 77 days, properties which are priced correctly are seeing strong activity, and even occasionally, multiple offers. Furthermore, if you're one of those that needs to sell, you are facing a financial deadline, and keeping your head in the sand isn't going to make it more likely you'll beat it. I can see two main tracks for properties out there: The ones that price correctly and get strong activity and a fairly quick sale, versus the ones that list. And sit. And eventually have to lower the asking price even lower than where it should have been to start with. The longer you wait to price correctly, the more it will cost you. In this market, just like any other.



Caveat Emptor