For a while now I've referred to our San Diego residential real estate market as being psychotic. Depending on how you looked at it, you would get a totally different, conflicting viewpoint. The lenders and some sellers have played hardball like it was a seller's market. The press and the buyer's all believe it is a buyer's market. Properties have been getting multiple offers beyond our hottest sellers' market. Prices / values continue to slide pretty much across the board implying a buyers' market. Some agents perceive the market as hitting bottom while others see a continued decline throughout the year (and possibly beyond).
What IS the truth?
Beyond the oft repeated statement that all real estate is local, if we look at the local inventory by price range a clearer understanding of why there appear to be multiple markets in motion here. (And for those who want to make the discussion about geography, the price points tend to be associated with specific locations, but it seems to be less about the location than the price.)
When presented this way, it almost jumps out that we have three different markets. Our "hot" market is for properties in the $200,000 - $450,000 price range. Up to $800,000 is a more "normal" market. And beyond that it is clearly a buyer's market.
I will have to go back and try the same exercise on prior years.
For those of you in other areas, this might be a useful excercise to see where your price points are.
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Robert T. Boyer, Ph.D. San Diego's Finest Real Estate RobertBoyer.Realtor@gmail.com |
Robert T. Boyer, Ph.D. San Diego Foreclosures and Real Estate Investments Your San Diego CA Real Estate and REO Specialist Centrally located in Carmel Valley Serving North County San Diego Real Estate including: La Jolla, Del Mar, Carmel Valley, Rancho Santa Fe, Solana Beach, Cardiff by the Sea, Encinitas, Leucadia, Carlsbad, Oceanside, Vista, San Marcos, Escondido, Rancho Bernardo, Poway, Rancho Penasquitos, Scripps Ranch, Tierra Santa, Mira Mesa, University City |
My client today said, "I don't understand why [the REO seller] needs my FICO scores. They're not giving me the loan; they're the sellers, they shouldn't care... My pre-qual letter should be good enough... I'm not going to go through this effort for the heck of it."
I shared that I've been told there is more fraud now than before and that the REO seller wants to make sure they've got a truly qualified buyer. They can't afford any more loss.
Still my client put forward rational arguments with frustration that they should have to play the bank's game. Why in this buyer's market should be bank play such hardball? They have their addendum and they won't budge. Take it or leave it.
It dawned on me (hours later) what is really going on. The trigger was something else my client said, "Everything is negotiable between the buyer and seller."
A "negotiation" is an "exception". The REO seller is not an individual (in a semi-adversarial position) trying to scrape out the last dollar in a transaction. They don't have the time! They have a ton of properties to dispose of. They need an efficient assembly line. Anything that causes an exception jams up the machine and they lose far more than they might gain.
Additionally, if you have an assembly line with a well defined process, you can easily bring in additional or replacement people with minimal experience; just follow the play book. In the past year, it is clear the lenders have been developing and refining policies and procedures to make their machinery efficient. E.g., won't even consider an offer unless it is complete; require their lender to qualify the buyer, only look at an offer abstract, etc.
This assembly line analogy helps me to better understand why the banks might be making decisions that would seem contrary to what would most benefit an individual. They are not hand-crafting a Lamborghini, they are pumping out Fords.
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Robert T. Boyer, Ph.D. San Diego's Finest Real Estate RobertBoyer.Realtor@gmail.com |
Robert T. Boyer, Ph.D. REO Specialist Your San Diego CA Real Estate Connection! San Diego Foreclosures and Real Estate Investments Centrally located in Carmel Valley Serving North County San Diego Real Estate including: La Jolla, Del Mar, Carmel Valley, Rancho Santa Fe, Solana Beach, Cardiff by the Sea, Encinitas, Leucadia, Carlsbad, Oceanside, Vista, San Marcos, Escondido, Rancho Bernardo, Poway, Rancho Penasquitos, Scripps Ranch, Tierra Santa, Mira Mesa, University City |
I attended a seminar today which featured a Q & A with an asset manager (the person "at the bank" responsible for handling the REO). I mentioned that in our San Diego Real Estate market, we are seeing home prices back at Fall 2002 pricing and bidding wars to get these deeply discounted properties. In my view, these are the investors defining the bottom of the market because there are good, positive cash flow properties (in San Diego - normally unheard of). I should probably mention that these great deals tend to be around the periphery of San Diego, mostly along the SR-78 corridor, from Oceanside to Escondido and in the south bay area (e.g., Chula Vista)
From his world view, he sees a continuing decline in home prices for the next 3 1/2 to 4 years. His rationale for this is that the upcoming loan resets are more staggered and that they will run "on and on", instead of simply happening all at once and being done with them. However, he does see foreclosures peaking in the next 9-14 months.
If the properties around the periphery of San Diego are soon to hit bottom, then what? Actually, the two views are not mutually exclusive. The loan adjustments coming up are going to be for the Alt-A loans (the loan intended for the self-employed but abused to become the "liar loans"). These loans were mostly used for higher loan amounts (champagne tastes on a beer budget). The likely result will be that the inner areas and even inner core of San Diego are going to be taking the hit, while the periphery is left to stabilize.
Of course, if the economy does a total tank (or total turn-around), it will extend and deepen (or compress and make shallow) the expectations for the San Diego housing market.
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Robert T. Boyer, Ph.D. San Diego's Finest Real Estate RobertBoyer.Realtor@gmail.com |
Robert T. Boyer, Ph.D. Your San Diego CA Real Estate Connection! San Diego Foreclosures and Real Estate Investments Centrally located in Carmel Valley Serving North County San Diego Real Estate including: La Jolla, Del Mar, Carmel Valley, Rancho Santa Fe, Solana Beach, Cardiff by the Sea, Encinitas, Leucadia, Carlsbad, Oceanside, Vista, San Marcos, Escondido, Rancho Bernardo, Poway, Rancho Penasquitos, Scripps Ranch, Tierra Santa, Mira Mesa, University City |
Whether we are discussing San Diego Real Estate or any other, the "end" of any real estate investment is the disposition of property, typically via sale, independent of rolling it over via a 1031-Exchange. I can't tell you how frustrating it has been convincing people that the "great buy" of a high-end house limits the future buyer pool. In the attached chart, it should be clear that, based solely on the number of sales of the different bedroom / bathroom configurations of homes for sale, that (at least in the San Diego Real Estate Market), the way to go for single family detached homes (SFD) is a 3 br / 2 ba home followed by a 4 br / 3 ba home.
Certainly one could argue that more of those flavors of homes sell because there are more of them. Not wanting to end up with circular logic, perhaps there are more of those types of homes because there is more demand.
San Diego Real Estate price per square foot can often be a better measure of what is going on in the market because it normalizes home prices and eliminates the "but they're building bigger / smaller homes now." Of course, a bubble is a bubble no matter how large or small the homes are.
In the chart below, we find that each different bedroom / bathroom configuration of single family detached home has a different price per square foot. If everything else were equal, then the difference should be made up by the cost of the land. However, higher-end homes with the granite counter-tops, sub-zero freezers, cherry-wood built-ins, etc. tend to be larger. (Who builds a high-end 2 bedroom / 2 bath home?) So, an easy mapping to raw land value will be more difficult to calculate.
By curve-fitting the data, you can create a formula that effectively represents the overall market behavior. Surprisingly these come out with an R2 value of 0.98 and above. Then we can begin to estimate the value of a home because the formula allows us to normalize the time differential. That is, if a home is 10% above the rest of the market each of the last three times it sold (and as a general statement, we really don't care when those three times were), it stands to reason that if you know where the market is today, you can add 10% to get a real good basis for the value of that specific home.
Because it handles the time factor, it also allows us to deal with the value of comps in a rapidly declining (increasing) market. That is, instead of averaging in the value of a comp that sold 6-months ago, you can phase-shift the value along the time curve to a present value. Of course, maybe that's just a complicated way to say that when you know the market has dropped 10% since the comp sold, take 10% off its value.
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Robert T. Boyer, Ph.D. Your San Diego CA Real Estate Connection! San Diego Foreclosures and Real Estate Investments Centrally located in Carmel Valley Serving North County San Diego Real Estate including: La Jolla, Del Mar, Carmel Valley, Rancho Santa Fe, Solana Beach, Cardiff by the Sea, Encinitas, Leucadia, Carlsbad, Oceanside, Vista, San Marcos, Escondido, Rancho Bernardo, Poway, Rancho Penasquitos, Scripps Ranch, Tierra Santa, Mira Mesa, University City |
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Robert T. Boyer, Ph.D., takes an investor's approach to real estate. He analyzes the market for appreciation as well as cash flow. Co-Founder & CMO of FinestExpert.com - The Cashflow Search Engine
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