San Diego Real Estate: First Quarter Stats Suggest Decline in Home Values

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There are several major factors affecting the San Diego real estate market.

1. Inventory

As inventory increases, prices usually drop. Detached homes throughout San Diego county went up about 30% during Q1 2007.

This is pretty cut and dry economics: supply vs. demand. With a higher inventory (supply) than usual in the past couple years, home prices have dropped. While the 30% rise in the first quarter is normal for seasonal variation, the base inventory was already higher than usual at the beginning of the year. The question remains: will sales volume keep up with this summer’s rise in inventory?

Search all San Diego homes for sale at my website to check out current inventory.

2. Sales Volume

As the number of sales decrease, prices usually decrease.

Sales volume is directly related to inventory. Get out your Econ 101 hat! Inventory = supply & sales volume = demand. If the sales volume keeps up as inventory rises, then prices will remain stable. However, sales have not kept up with the rise in inventory for a couple years. This has caused the slow drop in home values we’ve seen in San Diego since the end of 2005.

3. Foreclosures

As foreclosure rates rise, prices usually drop. Foreclosure rates are near an all-time high.

Here is the typical scenario: a person buys a house with a “risky” loan in 2003-2005 (i.e. a 2-year adjustable Interest Only loan at 100% financing). After 2 years, his/her home value dropped and he/she couldn’t refinance. His/her monthly payments went up 30% and he/she were unable to make his/her mortgage payments, so the bank repossessed the home.

This increases the inventory of homes with motivated sellers (aka: the bank). A foreclosure won’t sell at much—if any—below market value (much against the common misconception). Banks still have financial interest in obtaining the most money they can. They are simply realistic sellers, willing to sell at a competitive market value—unlike many of the sellers on market today.

It is the motivated sellers who bring prices down in a market such as ours, and bank-owned foreclosures are becoming a sizeable portion of this category.

4. Interest Rates

If interest rates rise, prices usually decrease. The Fed has not raised the Federal Funds rate since June of 2006.

Rates have been slowly rising over the last few years, contributing to the prices correction we’ve experienced (though it’s also necessary to fight inflation, mind you). In the last six months, however, home loan rates have remained pretty steady, making rates a relative non-issue in home value changes. Moving forward, a change in rates will definitely affect local home values. What will the fed do next?

But is it all bad news for San Diego home values?

The answer: not necessarily.

5. Rental Rates

 As rents increase, prices increase. Average rents for all types of (rental) units increased 5.8% over last year (Union-Tribune, 1/16/07). Vacancy rates remain very low, at around 3%

San Diego rental prices have continued to increase over the past 2 years, even though home values have decreased. This is keeping prices from dropping further. Did you know that at the current time it costs almost the same to rent as it does to own? Sure, the upfront cost to rent is less, but you must look beneath the surface and include tax benefits.

Let’s take a $500,000 home in Clairemont as an example. At 100% financing, mortgage payments will be about $3300/month, including property taxes on a 5-year Interest Only option. Tax write-offs will be about 30%, which equals about $1000/month. Monthly rent on this home is about $2000. When you subtract tax write-offs from the mortgage payment, you’ll see that most renters are paying close to the full mortgage payment they would have to own the same home. Currently, renting in the average price ranges is almost the same dollar after taxes as owning with $0 down!

6. Local Area Demand

If an area is in high demand, prices usually increase.

San Diego is well-known for its wonderful weather and high quality of living. Baby Boomers with disposable income seek out spots like San Diego to retire to/invest in. Many young professionals and students pay high rents to live in our city. Vacationers and tourists pay top dollar to stay in beach communities. Unemployment is low, our job market has strength in its diversity, and construction permits are down, limiting the amount of future new housing inventory.

So although some buyers are being fickle or holding off altogether, there remains a great demand in San Diego for a well-priced home, as our long-term picture is as bright and sunny as our weather forecast.

The Punch Line

So what does all this mean? My Guess: we'll continue to see a slight correction of home values in the short-term, with the long-term picture for San Diego home values looking strong.

For more information, visit Team 73 Degrees.