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S.D. Housing Slowdown Won’t Last, Some Say

The relative slowdown in San Diego County’s residential real estate market that began in the fall has prompted many economists to temper their expectations for continued huge increases in home prices during the next 12 months.

But not all are convinced that a slowdown is here to stay.

“Realistic expectations” are returning to the San Diego residential real estate market, according to Peter Dennehy, a senior vice president and industry consultant at San Diego-based Sullivan Group Real Estate Advisors and a San Diego homeowner.

During the last week of 2004, Dennehy bought a four-bedroom, three-bathroom house in Kensington and sold a three-bedroom, two-bathroom home in Burlingame, near North Park, in what seemed like the blink of an eye. He evaluated the home prices in his neighborhood and said he “basically priced to sell,” rather than marking the property up above its perceived fair value.

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“I had a rational expectation of what my house would sell for, and I was able to get a great price,” said Dennehy. He said his home sold in the low $800,000 range, and the Kensington house cost him about $900,000.

Dennehy identifies his experience as exemplifying the turn the market is starting to take in the county.

“I think that homes that are priced realistically will sell, and they will still sell for more than they would have 12 months ago but the (residential) market is definitely normalizing,” he said.

While the median price of a new or resale home remains beyond what the vast majority of San Diego’s population can afford, economists, real estate brokers, and home buyers and sellers have noted a return to what Dennehy and others call “more realistic expectations” in a market that seemed to many the embodiment of irrationality for the last few years.

As a result, although the prices of new and resale homes have not decreased, the volume of sales has slowed throughout the county and the new home inventory has begun to inch upward during the first months of 2005.

“The performance of the residential resale market for the first two months of the year can best be described as lackluster. Sales volume has been disappointing when compared to historical and seasonal patterns,” according to Jim Scott, a San Diego real estate agent and the owner of Mission Hills-based Scott & Quinn Residential & Investment Real Estate Services.

He said in a monthly report that he would like to think that the excessive rain San Diego has been receiving has something to do with the sluggishness, but the truth is probably more in “matching buyer and seller expectations.”

With the median price of a resale home in December reaching nearly $500,000 and that of a new home reaching more than $700,000 in San Diego, sellers were, in Dennehy’s words, “asking the moon in prices.” That irrational expectation on the part of sellers led to unrealistic markups, which eventually curbed even some of the most aggressive sellers. The bidding wars became tamer and the broader market cooled a bit.

In the new year, experts are divided about how enduring the impact of last year’s brief lull in market demand will prove.

Scott points out that from his experience during the last several months, “the rate of sales is about half of what would be considered normal.”

Statistics bear this out as well.

According to Costa Mesa-based real estate consultant Hanley Wood Market Intelligence, formerly the Meyers Group, the sale of new homes in San Diego County began to slow last year. The number of homes sold in the fourth quarter of 2004 decreased more than 62 percent from the same quarter in the previous year.

From October through the end of December, 671 new homes were sold in the county, which is 55 percent less than the 1,487 homes (on average) sold in each of the preceding quarters in 2004.

According to the California Association of Realtors, the trend continued into early 2005. In January, the association said that, although the median price of a resale home in the county continued to increase 23.9 percent over the previous year, the volume of sales increased a mere 1.8 percent.

In a February newsletter from Real Estate Economics, a Laguna Niguel-based provider of real estate data and analysis, Mark Boud, the firm’s founder and economist, predicted that the rate of new home appreciation in San Diego County will slow to 7 percent, although it will outpace increases in Southern California as a whole.

Boud noted that during the recent 12-month period, the volume of new home sales had slowed by 14 percent in San Diego County, which outpaced the broader decline in the Southern California region that slowed by 9.5 percent.

On the other hand, the California Association of Realtors, in its latest forecast, continued to predict double-digit growth in home prices this year , 15 percent, statewide , yet at a slower rate. Last year, the rate of growth of resale home prices averaged more than 29 percent statewide, according to the association, which does not offer a separate forecast for San Diego County.

But Leslie Appleton Young, the association’s chief economist, emphasized in an e-mail that within San Diego, “the fundamentals appear strong.” She added that “the dynamics of the market are such that the moderate, entry level and condo market will likely appreciate above the state forecast of 15 percent.”

Dennehy also expects very little deceleration in the record 21 percent jump in home prices seen last year in San Diego County.

He said the slower rate of appreciation observed in the final months of 2004 is typical of that time of year and attributes the slowdown in new home sales then to higher inventory levels, which, he said, picked up slightly in the fall.

Dennehy is, however, cautious about calling the slower appreciation of new home prices a trend. He said that starting last fall, concerns arose over a potential rise in interest rates, demand slowed, and inventory started to build up in San Diego and parts of Riverside County. The consequence, he said, was that builders were not raising prices as quickly as they did last year.

In contrast to Scott, based on his experiences as a consultant to residential real estate developers and investors, Dennehy said that since January, “traffic levels have picked up and builders are burning through more inventory” of new homes.

The lower forecasts, therefore, may just be a sign that markets have normalized.

Dennehy points out that “this simply means it has become less of a seller’s market.”

“Inventory and pricing have stabilized, forcing sellers to become more competitive,” he said.

For local economist Alan Nevin, the director of economic research at San Diego-based MarketPointe Realty Advisors, it’s even more simple: The price of a home in San Diego is “just a function of real, live econ 101 supply and demand.”

In order for prices to reach unrealistically high levels and then quickly deflate, there has to be an “oversupply of product, but in the market for new homes in the county, the inventory of unsold homes is low, and has been for five years,” said Nevin.

The resale market, which is four times larger than the new home market, has low inventory as well, he said.

Nevertheless, he expects median home prices to increase by a mere 6 percent to 8 percent countywide in 2005. Nevin points out that, with the average home in San Diego priced at around $500,000, his forecast implies an increase in value of $30,000 to $40,000. “That’s not so bad,” he added. “And I think sales in 2005 will be every bit as good as in 2004.”

The consensus seems to be that the median price of a home will not fall during the next 12 months, it simply will not go up as rapidly.

This is the view of professor Raphael Bostic, the director of the Masters Program at the Lusk Center For Real Estate at the University of Southern California. The fact that the rate of home price appreciation will slow here simply means the market has weakened a bit, according to Bostic.

Still, Bostic does not see the slowdown as a serious threat. He expects a 5 percent to 10 percent annual increase in median home prices for Southern California, vs. the more than 20 percent increase seen last year.

During the last several years, home prices have gone up in places such as San Diego and Orange County for market-based reasons: “a lack of supply coupled with interest rates at historic lows.”

These economic fundamentals still prevail, Bostic added, but to a lesser degree.

Although it may take a few more days to sell a home this year than it did last year , the latest estimate from the San Diego Association of Realtors showed that a resale home sat on the market in January on average 58 days, vs. 41 days in the same month last year , sellers such as Dennehy who maintain realistic expectations about the price they set on their homes, may prevent home prices from increasing at the excessive pace San Diegans are used to.

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