We’re Six Months Past the Bottom!

Posted on December 27, 2012 | by Denny Oh

Yesterday, the San Diego Daily Transcript (SDDT) published an article with the following headline – Housing demand is up, inventory is low, and prices are increasing in San Diego.  According to the article, “the housing market took a turn six months ago with increased demand leading to higher prices.”  For reasons that seem to be unknown, buyers have shown a drastic increase in activity and are snatching up inventory as quickly as they can.

The article also suggests that prices are rising because of the increased demand and lack of supply, which I completely agree with.  It’s more common to have multiple offers on a listing than not, and people are bidding on properties reminiscent of the mid 2000s.  Think about it this way:

If there are 15 people looking to buy a $300K condo downtown and there are only 10 to choose from (there are currently 14 condos for sale downtown below $300K, but 4 are at the Hard Rock Hotel), not everyone will be able to buy one.  Additionally, some of the condos that are available might not be very nice, or might not work for any of the 15 buyers.  So when a “nice” one comes on the market, you might see 10-15 of those buyers bid on the same condo.  Since only one buyer can get it, the next time a nice condo comes on the market, the remaining 14 bid on it, leaving 13 buyers who have now been outbid twice.  This process goes on and on until all the buyers get a condo, or give up.  For the buyers who can spend more, they’ll get more and more aggressive with each property they lose out on, driving the prices higher and higher.  I’ve seen this first hand and have seen some property values rise as much as 35% in 6 months.  I know this is a different/unique scenario, but units that were selling for as low as $145K in July, are now getting offers above $190K.

The question is, will the prices continue, or will it stop/reverse once inventory increases?  In the article, Alex Rojas of Shorepoint Real Estate says that inventory will rise when the short sale process become easier and faster.  He also references people who are behind on their mortgages, which account for the shadow inventory everyone talks about.  I disagree though.  Short sales have already become MUCH easier and faster in the last year.  I’ve closed some in as little as three months and I haven’t had any problems getting prices approved.  Also, there are only about 23,600 subprime loans in all of San Diego county (580,648 loans total) and delinquency rates are decreasing.  

I tend to be pretty conservative, but I do think we’re moving in the right direction and while prices might not continue to rise steadily, I don’t see them going down.  There are less short sales and less REOs and I don’t think shadow inventory is a concern.  REOs are typically being rented out and banks aren’t flooding the market with units for sale.  And when banks do decide to sell them, I don’t see why they would dump everything onto the market at once.

Nathan Moeder of The London Group said that this high demand/low inventory/increase in price trend is excepted to continue for another 24 months or more.  The article also said that “the county is about two-and-a-half to three years away from a ‘meaningful increase’ in inventory,” referencing Moeder.  The cause for the low inventory, according to the article, is because most people don’t have enough equity to sell their homes and make a profit, or even break even.  I think this is true for the most part and some people aren’t selling because they don’t see anything that they want to buy – even if they can sell, there’s nothing on the market that they want to upgrade/downsize to.

So where does this leave us?  Basically I see a market where buyers are confident we’ve passed the bottom, sellers who are getting prices we haven’t seen in almost 10 years and interest rates that haven’t been this low since…ever?  If you’re thinking about buying or selling, please let me know if you have any questions.  Thanks.

Denny Oh 858-243-2092 [email protected]

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