San Diego Home Sales Figures: Not All That They Seem by Bob Schwartz
Reviewing the recently released real estate sales data for San Diego, the lay person might conclude that the June home appreciation figures were down approximately 1 percent as compared to June 2005. The reality is the decline is probably much closer to three or five times the published figures. The reasons for this are really quite apparent when one considers the following facts: - The appreciation figures cited are the median sales prices. The upper-end, luxury home market has been extremely strong in Southern California and is relatively immune to increasing interest rates. It operates totally apart from the rest of the real estate market. The sales of these upper-end luxury estates skew the median appreciation sales data.
A far more accurate figure would be the average sales price. Alternatively, data should exclude, or make million dollar plus sales a separate category. - The reported sales data does not take into consideration incentives used by not only major builders, but, in today's market the majority of home sellers, to entice scarce buyers to purchase their properties.
Just open up the Sunday real estate section of your local paper and the magnitude of these incentives becomes quite apparent. Just a few incentives I noted in my recent paper: $15,000 closing cost credit and $25,000 towards an interest rate buy down or upgrades; $50K to help pay your mortgage; seller pays interest portion of your new loan payment for first 6 months, all nonrecurring closing costs, plus 12 months of HOA fees. I could go on, but, you must understand that the builders are not being altruistic. No, they just want to move standing inventory, and move it now before any further declines! While on the subject of builder incentives, it was just a little over a year ago that the majority of builders were not even co-operating with real estate agents. Now, the builder/agent cooperation has gone 180 degrees plus! Typically, builders offer two or 2.5 percent co-op commissions. Now, agents are being invited to catered brunches and offered co-op commissions up to 5 percent, as advertised in the July 23, 2006, Union-Tribune! The purchase incentive phenomenon is not by any means the exclusive domain of new home builders. Actually, I would say the majority of individual homeowners are also being forced into the incentive game. Though not many are offering incentives from the start of their marketing, after six to eight weeks on the market, the idea becomes more appealing. Even without offering any incentives, the majority of offers are now being presented with buyer incentives built-in as a condition of sale! A year ago one would be hard pressed to find any individual home seller or major new home builder offering incentives. Now, it is just these incentives that also skew the appreciation data. A $500,000 home sale with a $25,000 interest rate buy-down/closing costs package incentive will be recorded as a $500,000 sale. Yet, the $500,000 sale, in reality was only $475,000 or 5 percent below the reported sales data! So if the $500,000 sale was just 1 percent below the June 2005 median appreciation, you can see that the 'real' difference was 6 percent below last year! Other factors not being mentioned in the press that are important to our market direction are: Typically the period from late March through September is the strongest for real estate sales. What does both a huge and continuing month over month sales decline and now a home appreciation drop, during this 'hot' time, portend for the market as it enters the weaker Fall/Winter period? Lastly, the bulk of the interest only, 100 percent loans used to prop up our market for the last few years, has two or three year time periods until the re-amortization (at the current prevailing interest rates) of the loan balances. The majority of these interest rate adjustments will occur in 2007 and 2008. In my opinion, this is no 'return to normal' or 'slight correction' to the San Diego real estate market. By year's end there will be no denying we will experience a double digit appreciation decline. A decline that will take years, not months, to work itself out. |
