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San Diego Led Us Into the Housing Market Downturn -
Is It Leading Us Out?

San Diego started to see home price sticker shock that developed into housing market contraction in the summer of 2004, at least a year or more earlier than other major metro areas. There are now some regional indicators to watch that show some positive signs that the San Diego County housing market is at or close to the elusive “bottom” from which market recovery will commence.

First consider a few quick big picture trends:

1) NAHB/Wells Fargo Housing Index finally moved up this month. Jumping from 9 to 14 (5 point increase), the index posted the best one month adjustment in five years and it is the highest it has been since October.

2) Watch consumer spending. We should see a jolt in the next two months with tax refunds arriving. This should give a little juice to second quarter GDP (although we expect many people will also hold on to the cash for safety).

3) More Homes are Selling: According to MDA Dataquick, San Diego County home closings totaled 3,020 units in March 2009, up 43% year-over-year from March 2008 and a gain of 22% from February 2009. This marks the ninth consecutive year-over-year gain in monthly home closings volume. This gain comes via stronger sales in the existing detached and condo markets (up 61% and 50% year-over-year respectively), while new sales are down 36% year-over-year, reflecting much reduced new building activity. On the other hand, a number of regional builders, including Davidson, Shea, Centex, KB Home, Colrich and Cornerstone are now launching new phases or projects in response to improvement in market activity.

Now consider that there are 12,126 total listings in San Diego County today – this month’s 3,026 resales equate to about four months of inventory (and three to four months has traditionally been considered “healthy”).

As perspective, last year at this time inventory was over 18,000 units. Resale inventory has been dropping quickly in past weeks…it was over 14,000 units as recently as the end of February.

And keep in mind that March closings likely represent sales in January/February – we will see stronger numbers as we move forward given that sales and traffic increases appear to have picked up markedly starting in March.

So are we out of the woods yet?

Not quite. We need job losses to abate and consumer confidence to continue its upward movement. Further, we need to monitor the foreclosures still to come from banks since there are reports of a significant backlog and notice of defaults are back on the rise (see graphic from ForeclosureRadar.com below) following the lifting of the moratoria on foreclosures. REO sales have represented over half of county home sales in recent months and we need to see this stabilize and then decline. The improved activity is still confined primarily to conforming loan price categories (and particularly to housing priced under $500,000), although we are starting to see some early signs of thaw in the availability of jumbo financing which should help the still-stagnant high-end market.

But the improved sales and lower inventory numbers in San Diego are great news. Many new subdivisions in the region are reporting an increase in traffic and sales in the past month and a half fueled by historic confluence of housing-positive factors; including lower home prices versus 12 to 24 months ago, low mortgage interest rates for qualified buyers, state and federal tax credits and a more positive feeling about the direction of the economy and housing. This is further depleting the supply of new inventory.

These indicators are moving in the right direction. And San Diego County will likely be an early sign post of true bottom and the subsequent recovery.

Sullivan Group Real Estate Advisors conducts feasibility studies, strategic plans, repositioning and product, pricing and absorption analysis for homebuilders, developers, lenders and the public sector all over the United States. In the last 12 months, we have completed 350 studies in 50 metro areas. Please contact Tim Sullivan at 858-523-1443 x152 or at t.sullivan@sgrea.com.