Segmented Real Estate Markets And Taking Advantage of Them

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I've been saying that the San Diego area real estate market has suddenly gone white hot. Multiple offers are the order of the day with most properties. I really need to make a distinction here: That's not the way the whole market is. In fact, there is a huge amount of market segmentation going on.

Market segmentation is what happens when certain things are much more in demand than others. Right now, the central area of San Diego is in high demand, simply because it's so close to everything. That's where the jobs are, all the cool nightclubs and restaurants, places to go and things to do. The Eastlake area is in very high demand, because you can get an almost new highly upgraded 3000 square foot house for half what the developers were selling them for five years ago. The North County Coastal region is probably hotter than anything else, because of the common belief of being where all of the really wealthy people live - the strip between Del Mar and Carlsbad has long been some of the most desired real estate in the world, and Rancho Santa Fe is the most expensive Zip Code in the country.

Once you get away from those areas, however, things are a lot more friendly to buyers. Some clients put in an offer on a property in Escondido, and some others on a property in Ramona, and instead of competing against a dozen or more offers, I'm pretty sure we're the only offer despite what one of the agents is telling me. La Mesa is seeing movement, but it's not anything like what's happening in North Park despite being maybe 6 miles further east and usually being able to get to Mission Valley and points north quicker from my house than from most of North Park, simply because it's such a pain to get out of North Park. Downtown might be five minutes longer from La Mesa. South Bay is usually quicker from La Mesa. The houses are similar construction built at comparable times, and on average the La Mesa houses are larger and situated on bigger lots. Yes, gas is headed back to $5 per gallon because our current government isn't going to follow up on what President Bush did last summer to drive the price down, but don't confuse "lesser distance" with "use less gas getting where you need to go." North Park is a horrible place to drive.

Pretty much every area is seeing more movement in the market than just a few months ago, but some areas are seeing a normal market with give and take, while others are seeing a white hot seller's market with ten or more offers on everything. Those extremely hot markets are seeing a lot of movement and if it weren't for HVCC preventing honest evaluations, we would have seen an even stronger recovery.

Some offers are more equal than others, and the new appraisal standards make them even more so. An "all cash" offer beats everything else for the same number of dollars. Offers under 70% loan to value offers beat everything except "all cash". Offers with twenty to thirty percent cash down come next in line. Exactly what beats what gets complicated and varies from property to property, but absolute bottom of the barrel is minimum down payment FHA loans. If you've got something near the top of this ladder, competing in the white hot areas may be something you can profitably do, particularly if you're willing and able to waive the appraisal contingency. Those areas are going to see rapid price appreciation in this environment, particularly if the industry forces lined up against it (NAR and NAMB, among others) manage to get those new appraisal standards repealed.

If, on the other hand, you're one of those trying to buy with minimum down FHA loan (or something else way down the preference ladder), you're not going to be able to compete with the offers at the top of the ladder. It's not really completely reasonable, because FHA standards aren't nearly so obnoxious as they to be, but they still take longer, have more opportunity to fall apart, and require more from sellers, even if you're not asking for seller paid closing costs. If you are asking for a seller paid contribution, then the sellers are understandably going to want an even higher offer from you to offset those costs, as well as a premium to convince them to sell to you rather than the people coming in with a conventional loan with 25% down. This raises the specter of whether or not the property will appraise for the necessary value to consummate the transaction, with it being increasingly unlikely. Lenders in particular are unwilling to consider these sorts of offers for lender owned property because they often require the lender to spend money fixing up the property and can then fall apart anyway, the ultimate bad trip for them.

So what buyers in this situation need to do is zig when everybody is zagging. Look in the less trendy areas where the competition isn't so severe. Consider properties that are solid, but not necessarily so visually appealing. In such a situation as yours and a market such as this, you want to offer on properties where you may be the only offer, or only need to compete against people in similar situations. It isn't forever and you don't have to stay there the rest of your life. It may take longer for property appreciation to hit these sorts of properties, but it will hit when people start to realize that San Diego is never going to be this affordable again. Remember 2002 and 2003, when people were glad to get a rotten little tiny property in bad shape (and way out in the boonies) even though there was no way their family was going to fit into it? Those days are coming again. Proportionally, those properties will see even more appreciation from this point than those that are already highly sought after. I'm advising people with lots of ready cash to buy as many condos as they can, as condos have been hit especially hard in the downturn. And as I've said a time or two, buying such a property makes it likely you'll get what you really want sooner. The ability to harness leverage in your favor is more powerful than any other investment you can make, if it succeeds. The current environment makes carefully structured plays on leverage very likely to succeed. Not guaranteed, as
There is No Such Thing as a Risk Free Investment, but very likely to succeed. .

There is always some segmentation in the real estate market, but we're seeing a higher level of segmentation now than I have ever seen in the past. Some types of property are more attractive to the aggregate market than others, and command a higher price as well as higher demand for them, and people are fighting like
gingham dog and calico cat over them right now. But those properties few people are considering now because people are still used to the buyer's market we had can be obtained more easily and for a bigger discount now simply because everybody is competing for the big beautiful properties in trendy areas will show a larger percentage gain later, when the big beautiful properties in trendy areas are completely out of reach, and large amounts of people start looking for substitutes because that's all they can have. The big beautiful properties in trendy areas are doing very well right now, thank you. They are quickly returning to nearly their peak price levels and the time to get a real bargain on them was a year or so ago. But the substitute properties, while severely lagging now, will catch most of the way up later, meaning that money invested in them will earn a higher return and quite likely enable those who do so invest to afford the big beautiful property in a trendy area once it does.

Caveat Emptor

Article UPDATED here


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This page contains a single entry by Dan Melson published on June 8, 2009 7:00 AM.

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