2009 Quarter 3: Extreme Market Segmentation

Posted on 12/07/2009 By:Adam Pascu

Most trends started in the beginning of the year have continued throughout the year. Strong sales numbers, lower inventory, steady low rates, and an extreme differentiation between markets in different price points.

So, as you review the numbers as a whole below, please bear in mind that the entry level market has further differentiated itself from the luxury market right now.

The status of each particular market segment depends greatly on the price of homes in that segment. I’ve written about this for 2 quarter’s straight - please visit my 2nd quarter updates article for more detailed explanations and examples of this stratification.

Sales Numbers Slightly Up: The number of detached homes put into escrow each month increased a bit over the third quarter. (Please note that the apparent drop in sales seen around June may be due to a change in MLS status categorization – read about contingent short sales in my last update here.

Here are the numbers since January 2008:

2008                                                       2009
January: 1186                                      January: 1992
February: 1455    February: 2110
March: 1823                                         March: 2408
April: 1973                                            April: 2406
May: 2047                                             May: 2254
June: 1921     June: 1999
July: 2055                                             July: 1922
August: 2101                                        August: 2037
September: 2247                                September: 2045
October: 1985
November: 1797
December: 1609

Lower Inventory: Number of detached homes for sale countywide has been steadily decreasing over the last 12 months. We currently have our lowest inventory since May 2005. Search all San Diego homes for sale at my website.

Government Tax Break Extended &Expanded:
1. $8000 federal tax credit to “first-time buyers” extended. (must be in escrow by 4/30/2010 & close by 6/30)
2. Income limit raised from $75k to $125k an individual and from $150 to $225 per married couple
3. Move-up buyers having lived in their current home 5 of 8 the last years may receive a $6500 tax credit

Many people have theorized that our recent sales numbers are in part due to those trying to buy before the old deadline of Nov. 30. I’m curious to see how this extension/expansion will continue to affect our market. I’m hoping the expansion to include move-up buyers will help the relatively struggling higher end markets by giving a boost to the mid-market.

Home Loan Rates Still Low: Home loan rates have bounced from upper 4’s to upper 5’s this quarter. Currently, we are seeing quotes in the 5 – 5.5% range for the most part. Home buyers still have an unprecedented opportunity to lock in one of the best rates in history.

How Long Will Rates Stay Low?: The big talk this year has been that printing too much money by governments will cause inflation. With inflation come higher rates.

The US isn’t the only major economic power printing a significant amount of money to counterbalance recession. Many major countries have done it this past year. Oversupply of money is a major, but not the only, cause of inflation. If I understand the economics correctly, printing the right amount of money can stimulate a depressed economy without causing inflation if the velocity of money is falling. We print money on a regular basis to keep the velocity of money at a healthy rate or else our economy would deflate. Did/will the governments of the world print too much money? That’s what I’m concerned about, but we have yet to see the results of our actions, nor is the story over. Google terms like “quantitative easing”, "printing money", "inflation/deflation" or "velocity of money" for more in-depth economic explanations, theories & opinions on current governmental policies regarding printing money. It’s really quite fascinating and way beyond my scope of expertise to give a good analysis/prediction on this.

Most Economists expect rates to stay steady or rise slightly in the very short-term (3-6 months) and start climbing as inflation or stagflation sets in. I tend to agree, but how much and exactly when?

View charts on Home Loan Rates: 30-year fixed rates from 1971-2006

Home Values on the Rise?: I am now seeing concrete evidence that prices in the more desirable entry level markets have gone up due to a continued shortage of supply in comparison to demand. For example, I listed a home in Poway this month for more than any comp in its area (3/2, 1200 sq ft home for $375k). It sold in 7 days for nearly 10% more than what I listed it at. We had over 30 showings the first 3 days and many offers. I followed the trend of that market over the last 6 months and saw a continued rise in home values for similar sized homes. It seems clear that this market segment hit a bottom around the beginning of this year.

Are the Foreclosures Coming?: We keep hearing about a new wave of foreclosures that are supposed to hit market, but the stats have yet to show this. Realty Trac reports that San Diego saw a 5% decline in foreclosure activity in the 3rd quarter in comparison to the 2nd quarter. Even if we do see more foreclosures, these homes are selling very fast, so I feel that our demand will be able to match a small increase in supply without prices falling again.

What should I do?: I don’t know… Buying or selling a home will always depends on your current situation, your goals and your whims, just as much as the market’s economic indicators…As a San Diego realtor, I am happy to offer free consultation to you, your friends and family whenever requested. I continue to appreciate referrals received and look forward to helping a friend of yours buy or sell a home soon.