San Diego real estate price appreciation has outpaced the rest of the nation, according to a recent headline in local news. Other news reported that San Diego County housing prices rose 11.7% in April 2010, over April 2009. With home prices increasing for the past eleven consecutive months, most pundits proclaim that the real estate decline bottomed a year ago and the worst is over. The worst would appear to be the 40% decline in value, from the top of the market in 2005.
In light of the above news, one would be hard-pressed not to agree with the consensus opinion that the bottom has been reached in the San Diego real estate market; the current recovery seems to be outpacing the national averages.
In 2005, I wrote an article entitled where I predicted that the trends I saw occurring in the San Diego real estate market, which defined classic irrational exuberance, were not only about to take down the San Diego market, but I believed, would affect the entire nation. I was not alone in raising the caution flags about the real estate market, and those who were caught up in the exuberance of the market as well as many media outlets, coined the term bubblehead to myself and others, to imply a certain foolishness to those who would speak out against such a powerful and (certain to be) continued annual double-digit real estate appreciation.
It was difficult to raise the caution flags in 2005. The San Diego real estate market from 2000 to 2005 appreciated on average approximately 20% per year. Until the summer of 2005, when the sales volume started to fall but the prices were still appreciating, there weren't obvious signs of pending trouble, especially to the layperson. Most did not foresee a market collapse. Even in the latter part of 2005, while the slowing market became quite evident, the conventional consensus of opinion was that it was just a normal pullback. Most optimistic outlooks touted a strong market and a great opportunity for many to purchase real estate in San Diego before the upswing resumed.
Now it is July of 2010. Similar though different, market conditions make it again difficult to go against the conventional trend which is stating that a bottom has been put in place and we are on an upward rebound. I recently attended a seminar by a prominent real estate economist who forecast a slow but steady rise in San Diego home values. His charts and facts presented at the seminar were quite impressive. Not being a real estate agent or broker “in the trenches,” I believe his data was not reflecting the most current conditions, especially after the expiration of the federal tax credits.
It's hard to say exactly what effect the $8000 federal tax credit for home buyers had on the San Diego real estate market. Personally I believe it to be very similar to the government's cash for clunkers program, whereby, it pulled buyers from future months into the current program. The result was an increase in the actual housing demand and values for people trying to get in before the credit expired. When the cash for clunkers program ended, auto sales took a nose dive for a number of months before finally stabilizing.
The federal $8000 credit ended on April 30, 2010. If you had a property in escrow on or before April 30, and closed it before the end of June (now extended through September) you would be eligible for the credit if you qualified. The housing figures now being reported reflect this activity created by the $8000 credit. As long as the property went into escrow by April 30, sales could close in May and June which still affects housing numbers. Housing sales reports are usually closed sales and unlike the stock market, it takes some time for a property to go through escrow. The first housing numbers to be reported, that don't reflect as much of the effect of the government’s $8000 tax credit will be sales for July, reported during August. California instituted its own tax credit which went into effect on May 1, 2010. Only 100 million was allocated for this and the California franchise tax Board reported that as of June 15, 80% of this amount had been allocated.
One could speculate that the current slowdown I’ve seen in San Diego neighborhoods would not be reflected in reports for closed sales until August. On July 1, the national Association of Realtors reported that sales of existing homes dropped 30% in May from April. For the Western states this drop was reported as 20.9%. Though the West obviously was doing better than the rest of the country, the huge double-digit declines are a major red flag that cannot be ignored.
Don't be fooled by the media talking heads’ effervescent housing recovery rhetoric. Keep in mind that many of their sponsors and advertisers are from real estate related industries. Plus, many of the same media talking heads were the same folks who stated there was no real estate bubble and any slowdown was an opportunity to jump into the market in the summer of 2005.
As an active San Diego California real estate broker I could see a marked decline in real estate activity, in many local areas within San Diego, right after the April 30 federal tax credit expiration. Homes listed for sale that just a few weeks earlier would've gotten multiple showings in one week, are now lucky to be shown once a week. Indications from local escrow companies and from a major San Diego mortgage company indicate that this slowing trend is significant and widespread throughout San Diego County.
What's really troubling, is that the government tax credit was not enough to jumpstart our local housing market. Plus, the fact that this new downturn has started in the seasonally adjusted hottest marketing timeframe, coupled with historically low home mortgage interest rates, would indicate that as we approach Fall and Winter, this trend could easily accelerate. Perhaps the culmination in a real San Diego real estate market bottom will occur in late 2011 or 2012. It would be nice to say the worst is over, but is it?