San Diego Housing Market March 2008: Heating Back Up

I know I've been predicting this for eighteen months, first from a trendline and later from watching the local market in action. I was hoping to see the recovery start last summer but that was when the national media finally picked up on how bad things had gotten. When masses of people are hearing gloom and doom daily, they're not likely to take out mortgages to buy real estate.

But in the last month, things have turned around so much it's actually a little scary.

The last three properties I've been involved in negotiations for all had bidding wars going on. Right now, I'm waiting to hear back from a house my clients have put in an offer on. I said an offer, but it's really more like a bid, because I know of thirteen competing offers on the property. It has been on the market for precisely six days as of right now, and today was the deadline for a "best and highest" from everybody. My clients offered almost ten percent over the asking price. At that price, I'm still seeing excellent value and if we get it, everybody will be happy. If we don't, there are still other properties they'll be quite happy with. But previous to that, I helped other agents with four and five offers competing against their client, and that was only in the last two weeks.

Even the kind of buyer we're getting has changed. I don't know where they all came from, but offers with twenty and thirty percent down payment are coming out of the woodwork. Maybe they're all investors that sold at the top of the market and think the time is right to jump back in. Maybe they're representing foreign investors looking to buy at a favorable time. Suddenly, I've got a couple sets of clients with more of a down payment, on average, than I've seen since I've been in the business.

Now, before all of the desperate overpriced sellers and their listing agents start singing "Hallelujah!", these properties are special cases. They're in desirable locales, mostly with good schools, they're attractive properties, and they've been priced correctly from day one. Actually, the one that saw the best bidding action was somewhat under-priced to start with. Indeed, there's a property on the same block going through what has been the story for the past two years: Start overpriced, come down slowly bit by bit, until nine months or a year later someone like me notices there's value there and they've been on the market long enough that they're likely desperate enough to deal, and my clients come in and get it for twenty percent below what they might have gotten if they priced it correctly in the first place. It's a story that's been played out thousands of times here locally. I can sing this hymn verbatim with my eyes closed and no accompaniment.

But what happened is that these owners and their agents came out and listed the properties for just noticeably less than market on the first day. Exactly like I keep telling people, it generated enough traffic to more than bid the price back up and make up for whatever underpricing they had done. Furthermore, the properties are coming off the market and going into escrow within a very short time - a week or two, instead of several months. No carrying costs of thousands of dollars per month, or only very small ones. No trying to find the money for multiple mortgages, or rent plus the mortgage on the property they're selling. No stress of wondering when it's going to sell. Multiple offers came in from quality buyers with significant down payments and plenty of income to justify the loan. No stated income 100 percent financing, 2/28s, or negative amortization here. Sustainable, longer term loans are the order of the day - and A paper, too.

So far, this is a limited phenomenon, even if it is expanding. The sellers and their agents are still having to make the correct moves to get this to happen. Omit one of the critical items (correct price and attractiveness), and the property will still sit on the market. Mind you, bargain properties have always been able to move, even at the nadir of the market, but now more properties are moving more quickly, and the ones that stand out for value are seeing multiple highly competitive offers very quickly, something we weren't seeing the last couple of years.

So even though the headlines today are screaming that housing prices fell 13.5% from February 2007 to February 2008, those are sales which started six weeks or so earlier than that, due to the refinance mini-boom we had. The actual experience I and other agents are having out in the market these last couple of weeks has been painting a very different picture. Yes, it's all anecdotal, but if you put enough anecdotes together, you get a trend - and it seems like every agent I'm talking to is reporting the same thing.

There's a huge amount of pent-up demand for housing locally. I've been noticing people talking about holding off for better than two years now. Waiting for the market to show signs of bottoming out. Well, it's showing signs of the bottom having been sometime in the past now. I did call market top almost a year before the local Association of Realtors admitted it, and the current consensus by local economists has that I only missed it by a month. I just made appointments to see some properties with some clients on Saturday, and three out of three agents where the property wasn't vacant told me they're in counteroffers right now, and they may be in escrow by then. I told them to call my cell if that was the case, and we'd pass the property by.

For those who have been holding off, we have hit bottom. I've been saying all along the economic support was there for $350,000 to $400,000 starter level single family residences, and it now appears that has been borne out. If there are still a few thousand sellers whose property is sitting on the market because they're in denial of the decline, that's their problem. The people who are serious about selling, properties are not only selling, but they're seeing bidding wars like I haven't seen in five years. From this point on, the longer you wait, the higher the price you're likely to pay. When the word gets around, and the kind of pent-up demand that has been keeping the market depressed these last two years plus gets ready to strike, expect to see a significant recovery in prices before the media starts reporting a trend.

Caveat Emptor