Like it or not, we are sharing the real estate road with distress sales, those home sales where banks are asked to take a short position or are in fact now the owners of the properties. To what extent are these listings driving the real estate market? I think any rational person would argue that in San Diego we are at the point of impact.
Everyone loves pie, so here we go. This first chart shows the relative number of detached homes sold in the 2005 summer of love (July closings and according to the Sandicor Multiple Listing Service) which were listed as requiring lender approval. The distressed sale slice was negligible, which makes sense. At a time when many homeowners had enjoyed a five-year doubling in their property values, most anyone needing to sell could and did.
Now, compare that to today. In San Diego County, that distressed property piece of the pie is significantly larger.
David Gibbons from Zillow recently commented on a post here:
The Zestimate algorithm ignores foreclosure sales values. I assume you do the same thing when picking comps for your CMA’s. Foreclosures are not market-price transactions - at least not in a normal market.
No we don’t ignore them, at least not anymore, which was precisely David’s point. In 2005 we did, as foreclosures and short sales comprised such a small, insignificant segment of the market. Then, these outliers were easy to explain away. Not so today. Therefore, it is safe to assume what we all already know - This market is anything but normal.
Also from David:
Sellers have a huge problem on their hands if foreclosures have started to make the market. If so, falling prices will beget cheaper foreclosures and so on and so forth - with prices in free-fall until foreclosure inventory is sufficiently absorbed so as to no longer make the market.
Well said, David. I do believe throughout most of San Diego County we are at the point of impact, and all indications are that the distress sale trend will continue for the foreseeable future.
Does that mean it is time to head for the fallout shelter? Not necessarily. The fallout will vary depending on which micro-market in which you currently reside. As we have discussed in the past, some areas have been and will continue to be more severely affected by our current market than others. Generally, the outer edges of the county are seeing the biggest value drops. Prices in the coastal communities continue to hold up rather nicely. Real estate is local.
Here are a few examples. First, let’s look at Mira Mesa which enjoys a central location and has a median home price close to the median price for the county.
Here is what the south county Chula Vista 91910 zip code area looks like:
Finally, the situation in Scripps Ranch looks something like this:
In Scripps, you can see that the situation is not nearly as dire as in these other areas. If I were to spend my day comparing the dozens of other zip codes in San Diego County, I would see pies of all flavors. In some areas, the impact of distress sales is feeling like a head-on collision while in others it is more of a side-swipe.
But any way you slice it, our market is not a normal one.
{ 2 comments… read them below or add one }
Dave
03.14.08 at 12:57 pm
I agree that the “higher-end” areas will ultimately hold up better than the “lower-end” areas, which are currently in high distress. BUT… areas like Scripps Ranch and Poway - just to pick two - will decline substantially from here because of the substitution effect. The price declines start at the bottom, then buyers who might have paid up a little for a house in a “medium-end” area will notice how cheap things are one rung below (on a ppsf basis) on a relative basis and they’ll move down a rung to capture the better “value.” This will move up the chain and impact everything above it, albeit to varying degrees. But it always starts at the bottom. It’s the Plankton Theory of real estate. Once the plankton disappears, everything above it is impacted. If Chula Vista’s median is down 50%, Poway’s will ultimately decline 30% or so, and RSF and La Jolla, 20% or thereabouts (just to use some round numbers). The real estate plankton is just beginning to affect the medium-end areas and higher.
Kris Berg
03.14.08 at 1:07 pm
Dave,
What you are talking about is what I have long called the Trickle Up phenomenon. What this ultimately means is anyone’s guess, but you make a valid argument.