San Diego Real Estate Market: June 2008 Advice

My advice to sellers is very simple: Hold off if you can. Things have already improved, but better times are coming once more inventory clears. The prognosis for this is very good. I'm seeing fewer short sales, at least in my area, which means that there are fewer people who need to sell.

For buyers, it's not going to get any better than this. Stop worrying about whether the market has hit absolute bottom. Trying to time the market is worse than useless, and as I said in When You Should Not Buy Real Estate, the math works against buying for less than about three years duration. Look at the likely situation at least three years out in determining whether it's a good time to buy a place to live (if you can't last three years, stay a renter). That likely situation for property owners three years from now by comparison with now is so much better that I'm worried about diabetes every time I consider it. The local economy is doing well - enough people can afford higher prices than current to make this a strictly temporary depression in real estate prices. Growth policy is getting more restrictive all the time, and it's not like there's a whole lot of places left to build anyway. Increasing the density of existing housing doesn't seem likely in the short term, and the one municipal government that had a little bit of sanity on the manner has changed its tune for the worse. Against all these constraints on supply, demand keeps growing. The only thing working against price recovery longer term is the interest rate outlook, and I don't think those are going above the mid sevens, if that high - which would make a difference of about 10% to prices by equivalent payments - and the other factors more than compensate. Increased demand and economic ability to pay each account for more than that. Don't forget the effects of high gas prices, either, raising the value of the older suburbs that are closer in relative to that of the exurbs.

This buyer's market is not going to last three more years. I can't tell you exactly when it's going to become a seller's market again, but it isn't going to be three years. The ratio of sellers to buyers has dropped twenty percent in the last year, from 32.6 to 26.7, and absolute inventory is starting to drop - it's off over 2000 units in the last three months, when you'd expect more new inventory to be coming onto the market given the time of year.

Furthermore, those ratios are misleading because a large proportion of property for sale is still overpriced in terms of asking price when you judge by the prices things actually sell for. In my primary area, it appears that about sixty percent of what's on the market is overpriced given actual sales in the neighborhood. Some of these are Short sales where the lender just isn't going to deal due to mortgage insurance, and buyers would be wasting their time to make an offer. Others are represented by agents "buying" a listing, although that's pretty much a constant of any market. When you get down to sellers willing to allow their agent to market the property correctly and talk a reasonable price, the ratio is probably about ten sellers per buyer. Given that, Sellers don't have to compete nearly so strongly as they did even a few months ago.

Indeed, right now there is a severe constraint upon buyers that's likely to get loosened a bit in the near future: Available loans. The loan market always controls the real estate market. With San Diego designated a declining market by every lender I'm aware of, the buyers with small down payments have been locked out of the market. Currently, the only way to get high loan to value ratio loans is loans with a federal government guarantee attached: either FHA (decent) or VA (better). For conventional loans, the appraisal is automatically reduced 5% and the lenders are capping out at 90 to 95% of the lower of cost or market, which is to say, the lower of purchase price or appraisal. But Fannie Mae and Freddie Mac are still willing to buy 100% loans, at least up to the conforming limit (currently $417,000). It's just that the lenders they're buying the loans from who aren't. I'm not having issues with appraised value constraining the loan, but folks with less careful buyer's agents are, and they're needing a minimum 10 percent, and maybe 15% down payment just to get financing at all. But that "declining market" label came to us relatively recently, long after values had registered the lion's share of the drop we've had. It's going to warrant removal sometime in the not too distant future. Indeed, it seems to me that the numbers probably are there to support removal, but it's going to be a while longer before this fact is apparent, thanks to the boards of realtors who manipulated statistics to make the drop in property values appear as small as possible for as long as possible.

So what happens when the restrictions are loosened a little bit? Instead of ten to fifteen percent down payment, people need just 5% - and maybe none. Right now, people with 5% down payment just aren't a factor in the market for the most part. What happens to the seller to buyer ratio when they are? It drops. What happens when it does? Even more of the power swings from buyers to sellers. What happens to prices then? They shift upwards.

As a special note: The prices of Condos and Townhomes and even PUDs has been hit particularly hard - much harder than that of detached housing. I'm seeing nearly 200 current listings just in La Mesa, El Cajon, Santee, and Lemon Grove where the asking price is less than $150,000, and fifty have already sold. With an FHA loan, you can buy into those for 3% down, or roughly $5000. Payment on $150,000 at 6.5% (including FHA insurance) works out to $948. Add $200 HOA dues and $150 per month in taxes, and in many cases you're coming out about even on the rent - and that's without a significant down payment. Furthermore, less than $3000 per month of income can qualify you, when it might have taken twice that a few years ago and it still takes $5000 per month income for even the cheapest "fixer" detached home. With the Era of Make Believe Loans departed for now, Condos and Townhomes and maybe PUDs are going to be what first time buyers can afford in the future, and the price of gas is going to constrain people as to where they live. I expect those prices to recover more value, more quickly, than detached housing. These might not be what people want, but they are what people are going to be able to afford. Once prices start upwards again (and they will, soon), many people who won't consider them now will stop being in denial about economic reality. The choice for most folks is going to be "buy a condo or rent forever". Expect the demand and the prices to go up significantly.

Caveat Emptor